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Peter Thiel: Every Monopoly Has These Four Characteristics

By Peter Thiel · Strategy · 2 min read

All happy companies are different — they're doing something very unique. All unhappy companies are alike — they failed to escape the essential sameness that is competition.

Key Points

Proprietary technology: an order of magnitude better — Amazon 10x as many books, PayPal 10x faster than checks
Network effects: incredibly valuable but very hard to get started
Economies of scale: software marginal cost is zero — tremendous scale advantages
Branding: an idea lodged in people's brains — though Thiel says he never quite understands how it works

All happy companies are different because they're doing something unique. All unhappy companies are alike because they failed to escape competition.

All Happy Companies Are Different

Thiel: The opening line in Anna Karenina is that all happy families are alike, all unhappy families are unhappy in their own special way. The opposite is true in business. All happy companies are different — because they're doing something very unique. All unhappy companies are alike — because they failed to escape the essential sameness that is competition.

Every moment in technology happens only once. The next Zuckerberg won't build a social network. The next Larry Page won't build a search engine. If you're copying these people, you're not learning from them.

All happy companies are different. All unhappy ones are alike — stuck in competition.

Proprietary Technology: 10x Better

Thiel: My somewhat arbitrary rule of thumb — you want a technology that's an order of magnitude better than the next best thing. Amazon had over 10 times as many books. PayPal — the alternative was sending checks on eBay, which took 7 to 10 days to clear. PayPal could do it more than 10 times as fast.

If you actually come up with something totally new, it's like an infinite improvement. The iPhone was the first smartphone that worked — maybe not infinite but definitely an order of magnitude.

Amazon: 10x as many books. PayPal: 10x faster than checks. iPhone: the first smartphone that worked.

Network Effects, Economies of Scale

Thiel: Network effects can really help, and they lead to monopolies over time. The tricky thing is they're often very hard to get started. Even though everyone understands how valuable they are — there's always this incredibly tricky question: why is it valuable to the first person?

Economies of scale — if you have very high fixed costs and very low marginal costs, that's typically a monopoly-like business. Software is especially good at this because the marginal cost of software is zero.

Network effects lead to monopolies but are very hard to get started. Software marginal cost is zero.

Branding

Thiel: Then there's branding — this idea that gets lodged in people's brains. I never quite understand how branding works, so I never invest in companies where it's just about branding. But it is a real phenomenon that creates real value.

I never quite understand how branding works. So I never invest in companies where it's just branding.