The Art of Building a Monopoly


Have you ever wanted to have your name in
the news and millions in your bank account? What about billions? What if, for just one thing, the whole world
would have to come to you and you alone? If you’ve ever dreamt of building the next
Google or Facebook, you are in luck, for today we will explore the art of building a monopoly. People hope for a better future, a future
of progress that makes their life easier, safer and more rewarding. Everyone strives for progress in one way or
another: a baker strives to bake better bread, an airport
strives to get more flights and a horse breeder strives to breed faster horses. At the heart of all of these ambitions lies
the same thing: horizontal progress, taking something that exists and making it better. How you make it better does not matter because
at the end of the day, there will always be others who will gladly sell inferior goods
at a cheaper price. In the same way that the fastest processor
will never be the only processor in the world, the best lawyer will never be the only one. To build a monopoly, then, you need vertical
progress, the act of creating something that wasn’t there before. A monopoly built upon the fastest car will
never exist, but a monopoly built upon the first flying car may very well become reality. Vertical progress, however, is not enough,
for if you innovate without capturing some of your innovation’s value, you will be
eaten alive by the archnemesis of all monopolies: competition. That is why horizontal progress is so hard
to monopolize: you’re effectively trying to beat the best players at their own game. Have a look at the fate of commercial aviation,
arguably one of the greatest inventions of the 20th century. In 2013 airlines earned just $4.13 per passenger
at a time when the average fare was almost $760. In other words, the airlines earned $13 billion
of net income on over $700 billion of revenue. Compare this to a modern monopoly like Google,
who earned the same amount on only $55 billion of revenue and you’ll see why competition
is such a thorn in everyone’s sides. If you’re wondering whether Google is a
monopoly, the real question is what has Google monopolized? Google owns 89% of the global search engine
market and yet by positioning themselves in the global advertising business or the global
IT business they make themselves out to be a small fish in a very large pond. Make no mistake, all of their side ventures
like Google fiber and their self-driving car are just as much a defense mechanism as they
are attempts at innovation. In the modern information age, it is very
hard for a monopoly to survive once it gets in the public’s eye. After all, bragging about how successfully
monopolistic you are is a quick way to get audited and broken up. Thus, modern monopolies must survive by hiding
in plain sight. Americans enjoy mythologizing competition
as the great driving force behind innovation, but historically the greatest innovations
have come from the allure of monopoly. Without the promise of great wealth no one
in their right mind would risk their fortune on innovation. Note that there is a difference between becoming
a monopoly and staying a monopoly. In the 1960s, for example, IBM essentially
owned the IT business through their mainframe computers. Then during the 80s when the market shifted
to personal computers and hardware became less profitable, the power went to Microsoft
and their operating systems. Then Microsoft lost ground to Google when
mobile computing started to take off at the end of the past decade. History has shown that that if a monopoly
does not innovate it will eventually be replaced. How fast that happens depends on a lot of
factors, the most important of which is government support, but regardless of the speed, the
process of innovation is inevitable, and eventually even the worst monopolies of today will become
relics of the past. Monopolies have a bad reputation in the US
because the country has had to deal with a lot of bad ones in the past. Historically, the worst ones were those formed
around commodity goods, as was the case with Standard Oil and American Tobacco, which jacked
up prices to unreasonable levels. In a static world, that would be the only
type of monopoly, but our world is dynamic and ever-changing, with opportunities to innovate
lurking around every corner. To build a modern monopoly you need to seize
these opportunities. Said another way, what you want to build is
a creative monopoly, one that does not overtake and strangle an existing market, but rather
creates an entirely new one all for itself. In essence, you need to solve a problem that
a lot of people have. The trick here is that these people don’t
even know they have a problem. After all, the people of the 19th century
lived perfectly fine without cars, as did you 20 years ago without a smartphone. To build a creative monopoly you have to do
three things. First, get your hands on proprietary technology. Innovation is the mother of all creative monopolies,
and the harder it is for others to replicate your product, the more successful you will
be. You can try to innovate existing technology,
but in general you’ll need to improve something by at least an order of magnitude before you
can overcome your big established competitors. It is hard to build a monopoly this way, but
it’s not impossible and some of the biggest companies of our time did exactly that. Amazon offered more than 10 times as many
books as any bookstore in existence. Similarly, Apple definitely improved the design
of tablets by at least an order of magnitude, since they went from being borderline unusable
to extremely popular. Of course, by far the best way to innovate
is to create something entirely new, since then you don’t have any competitors to worry
about, at least initially. Next, you must harness economies of scale. A monopoly should only become stronger the
larger it gets, otherwise it’ll get destroyed by the copycats it will inevitably attract. It may seem delusional to think about scaling
to the billions while you’re still at the drawing board, but if your idea cannot scale
it will never become a monopoly. Economies of scale are why it’s so hard
to monopolize a service: after all, even if you’ve got the best doctors
in the world, they can only attend to so many patients at once. Software, on the other hand, lies at the other
end of the spectrum and is the quickest road to monopoly, since every new copy of your
product is only one click away. Harnessing economies of scale becomes even
more important if your product’s value relies on other people using it, also known as the
network effect. Consider the immense pressure people feel
to make a Facebook profile. Almost everyone has one and if you do not
join you are essentially dooming your social life to oblivion. But if none of your friends were on Facebook,
you wouldn’t be compelled to join at all, since what good does it do to join a ghost
town? The problem with monopolies that rely on the
network effect is that it’s very very hard to get the ball rolling initially. Your network must provide value to its users
regardless of its size in order to attract its initial userbase. Counterintuitively then, the best way to harness
the network effect is to start in the smallest market you can find. After all, Mark Zuckerberg created Facebook
for his classmates at Harvard, not for all of mankind. The final element you need is distribution,
collectively made up of advertising, marketing and sales. Remember all those people whose unwitting
problems you have solved? Those same people are being bombarded with
other solutions to other problems all year round. You must convince them that they need your
solution above all others, and to do that you need a distribution strategy. People tend to scoff at distribution because
it seems superficial and dishonest. After all, shouldn’t a superior product
be able to stand out on its own? In an ideal world, maybe, but in our day and
age even just convincing someone to try your product is a daunting task. Distribution is important because it works. You may think that you are an exception, that
your tastes are authentic and that only other, weaker-minded people can fall prey to advertising,
but make no mistake, you are not different. People tend to live with a false confidence
in the autonomy of their preferences because they’ve become very good at resisting obvious
sales pitches. But the best advertising is hidden in plain
sight, and the best salesmen are those whose performance is so captivating that you don’t
even realize that you’re being sold. The true masters of distribution have job
titles completely unrelated to what they actually do:
the people who sell customers are “business developers”, the people who sell companies
are “investment bankers” and the people who sell themselves are “politicians”. Persuading other people to buy what you are
selling is quintessential and in the end, regardless of whether you make money through
ad clicks or through government contracts, without a distribution strategy your monopoly
is doomed to fail. The allure of monopoly is hard to resist,
for although the opportunities are few, the rewards are great and those who succeed become
a part of history. If you wish to try your hand at this daunting
task, I can highly recommend the book “Zero to One” by Peter Thiel, the co-founder of
PayPal. This book is what inspired me to make this
video and it is a brilliant work that offers dozens of counterintuitive insights that will
help you see the world differently. You can listen to a free copy of it by signing
up for a free 30 day trial at Audible, who’ve been kind enough to sponsor this video. Visit http://www.audibletrial.com/businesscasual
and you’ll be able to choose from over 180,000 audiobooks, including “Zero to One”. I’d also like to thank all of our supporters
on Patreon. I hope you enjoyed this video, and as always:
stay smart.

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