Peter Thiel on Strategy and Competition

Introduction

• Speaker: Peter Thiel
  • Founder of PayPal, Palantir, Founders Fund
  • Investor in many tech companies in Silicon Valley
• Topic: Strategy and competition

Key Thesis: Monopoly vs. Competition

• Idée fixe: Aim for monopoly, avoid competition
  • Competition is for losers
• **Valuable Company Formula: Value Creation (X) and Value Capture (Y) are independent variables
  • Examples: Google vs. Airline Industry
    • Airlines: High revenue, low profit
    • Google: Lower revenue but higher profit margins

Perfect Competition

• Pros
  • Easy to model
  • Efficient in static situations
  • Politically favored
• Cons
  • Poorer profitability
  • Less stable
• Spectrum: Perfect competition vs. Monopolies
  • Monopolies lead to stable, long-term businesses
  • Dichotomy is often misunderstood
  • Market narratives often distort the real nature

Types of Lies Companies Tell

• Non-monopolist: Market is super small (to attract investment, differentiate)
• Monopolist: Market is large and competitive (to avoid regulation)
• Google Example: Pretends to be in a broad tech market

How to Build a Monopoly

• Start small: Target small markets to gain dominance
  • Examples: PayPal (eBay power sellers), Facebook (Harvard students)
• Expand over time
  • Amazon: Books → All e-commerce
  • eBay: Pez dispensers → Broad auctions
• Avoid large markets: Too much competition
  • Negative examples: Clean tech, Restaurants

Key Characteristics of Monopoly Businesses

• Proprietary Technology: Order of magnitude better
  • Examples: Amazon (book selection), PayPal (speed)
• Network Effects: Difficult to start, valuable if achieved
  • Economies of Scale: High fixed costs, low marginal costs
  • Branding: Involves consumer perception
• Example: Google's mix of advantages

Importance of Longevity

• Durability over time: Last mover advantage
  • Examples: Microsoft (OS), Google (Search), Facebook (Social Network)
• Most value in future cash flows
  • PayPal: Majority future value
  • Airbnb, Twitter, Facebook: Value in future cash flows
• Undervalued Durability
  • Need for qualitative assessment

Software and Monopolies

• Advantages of Software: Economies of scale, fast adoption
  • Examples: Tech companies accumulating cash

Historical Perspective

• Industrial Revolutions: Often Y = 0%, even if X is high
  • Scientists and innovators often unrewarded
• Rare Success Cases: Vertically integrated monopolies (Ford, Tesla, SpaceX)
  • Complex coordination required
• Software's Unique Position: High economies of scale and low marginal costs

Misleading Rationalizations

• Science: Charitable motives, overlooked non-economic gain
• Software: High capture percentage, not necessarily most valuable

Conclusion: Competition as Validation

• Deep Attraction to Competition: Imitative nature of humans
  • Personal narrative: Law firm example
• Costs of Competition: Can deter from bigger questions of value
  • Advice: Avoid crowded paths, seek unique opportunities

Q&A Highlights

• Identifying Monopolies: Look at real market, not narratives
• Google's Advantages: Network effects, proprietary technology, economies of scale, branding
• Vs. Iterative Lean Startups: Differentiation preferred over minor iterative improvements
• Psychological Challenge: Overcoming attraction to competition difficult