Peter Thiel, the founder of PayPal and Palantir, said the success of tech giants like Google, Facebook, and Microsoft could be boiled down to one factor – they are monopolies.
Speaking at Stanford University, Thiel said the aim of any company should be to become a monopoly in its sector.
Being a monopoly gives a business the freedom to set its own prices, ensuring high profits.
The alternative is a perfectly competitive business that competes on pricing to attract customers. This model erodes margins.
A good way to create a monopoly is to find a small niche where you can do something better than any competitor.
“It is much easier to create a monopoly in a small market than in a big market,” he said.
After you achieve a monopoly in your niche, you can expand your offering to cover other areas where you can dominate.
Thiel said that the world’s largest tech companies – Apple, Microsoft, Amazon, Google, and Facebook – have achieved their growth through being monopolies in a chosen niche.
Google, for example, started by dominating search. Microsoft had the most popular operating system, Facebook dominated social media, and Amazon monopolised online book sales.
After they became monopolies in their chosen niches, they expanded their products to increase revenue and profit.
“One of the reasons for the US tech industry’s success is that the environment is prone to create monopoly-like businesses,” he said.
Apple, Microsoft, Amazon, Google, and Facebook have a handful of business attributes which make them powerful.
- They have monopolistic businesses – Each company has a part of the business that dominates its niche and is highly profitable.
- They can adapt to change – When the market changes, these companies can change their product and business model. Good examples include Google adding mobile search to its offering and Microsoft moving to a licensing model for its software.
- Low customer acquisition and retention costs – Because of their size and reach, big tech companies have low customer acquisition costs and their ecosystems lock in users.
- They have moats – It is easy to maintain their competitive advantages because of the high costs to enter their market, their low marginal costs, and hard-to-replicate assets.
- Network effects – Their size gives big tech companies a huge advantage by benefitting from network effects and locking customers into their ecosystem.
To take on Apple, Microsoft, Amazon, Google, and Facebook is nearly unthinkable. Many have tried and failed.
Their ability to keep competition at bay and maintain their competitive advantages ensured large profits for many years.
What monopolies tell the market
It is easy to spot a monopoly – they work really hard to convince the market they are not a monopoly.
Because of the negative connotations with monopolies and legislation against them, these companies tell people they compete in large and competitive markets.
Google, for example, enjoys a dominant search engine market share worldwide. It clearly has a monopoly in the search market.
However, Google seldom describes itself as a search engine. Instead, it says it is an advertising company or a technology company.
It has a far smaller market share in these markets, which makes it look like Google is fighting against many competitors for revenue.
Google has even launched smartphones and other technology products to substantiate its claim of being a technology company.
As such, it changed the narrative from being a monopoly in the search market to just another player in the fiercely competitive technology market.
Thiel said monopolies like Google, Microsoft, Amazon, Apple, and Facebook have great incentives to portray themselves as small players in a big market to avoid government scrutiny.