Why competition is bad for your mobile startup

9 mins read

Table of contents


Peter Thiel said an interesting fact in an article in The Wall Street JournalWhat valuable company is nobody currently building? This question is harder than it looks because your company could create a lot of value without becoming very valuable itself. Creating value isn't enough—you also need to capture some of the value you create.

In “Competition is for Losers”, he talks about business strategy, competition, and the monopoly theory. The main idea that Peter uses as a rule in his business and investments is that, if you're starting a company or if you're the founder entrepreneur starting a company, you always want to aim for monopoly and you should always avoid competition because competition is for losers.

Peter, the founder of PayPal and Palantir, and investor in world-changers like Airbnb, SpaceX, and most of the tech companies in Silicon Valley, outlines 6 directions that you should understand as a startup founder, directions that we will present in this article, which are Capturing Value, The Lies People Tell, How to Build a Monopoly, The Last Mover Advantage, The History of Innovation and The Psychology of Competition.

Capturing value

How do you go about creating value? What makes a business valuable? We'd like to start with this first direction by saying something about the idea of embarking on a startup. There's a very simple formula, that if you have a valuable company two things are true:

  • Number one, that it creates "X" dollars of value for the world.
  • Number two is that you capture the "Y" percent of "X." And the crucial thing that people always miss in this sort of study is that "X" and "Y" are completely independent variables, and so "X" can be very big and "Y" can be very small. "X" can be an intermediate size and if "Y" is big, you can still have a very big business.

For example, even large corporations may be bad businesses. United States airlines serve millions of passengers and generate hundreds of billions of dollars in revenue each year. Yet, in 2012, when the average trip price was $178, airlines earned 37 cents for each passenger journey.

In comparison, Google generates less value but takes more. Google made $50 billion in sales in 2012 (compared to $160 billion for airlines), but it kept 21% of that income as profit - more than 100 times the airline industry's profit margin that year. Google earns so much money that it is currently worth three times as much as all the United States' airlines combined. Airlines fight against one another, while Google remains alone. Economists illustrate the distinction using two simplistic models: perfect competition and monopoly.

In Economics 101, perfect competition is both the ideal and the default condition. When producer supply meets consumer demand, a market is to be completely competitive. In a competitive market, every business is similar and sells the same items.

Because no business has a monopoly on the market, they must all sell at whatever price the market sets. If there is money to earn, more businesses will enter the market, increasing supply, driving prices down, and so eliminating the profits that drew them in. If too many businesses enter the market, they will lose money, some will collapse, and prices will return to sustainable levels. Under perfect competition, no corporation generates an economic profit in the long term.

"The opposite of perfect competition is a monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. -- Peter Thiel"

To an economist, every monopoly appears the same, whether it eliminates rivals, obtains a governmental license, or innovates its way to the top. We shouldn't have an interest in unlawful bullies or government favorites. If a corporation is so good at what it does, no other company can offer a near alternative. Google is an excellent example of a firm that progressed from 0 to 1. It hasn't competed in search since the early 2000s when it separated itself from Microsoft and Yahoo.

The lies people tell

So let us talk a little bit about the lies people tell. Imagine that there were companies that went from perfect competition to monopoly. And people who have monopolies pretend not to. So anyone who has a monopoly will pretend that they are in incredible competition.

Now imagine if you are competitive, and if you're in some sort of business where you'll hardly make any money, it will be tempting to tell a lie that goes in the other direction. And you will promise to do something unique that is somehow less competitive because you want it to be different.

Thus if the monopolists pretend not to have monopolies and the non-monopolies pretend to have monopolies, the plain difference is very small and the real difference is quite big. So there's this business deformity that happens because of the lies people tell about their businesses, lies that are sort of the opposite.

How to build a monopoly

Let's move on to the third direction. One of some very counterintuitive ideas that come out of this monopoly thread is that you want to go after small markets. If you're a startup, you want to get a monopoly. You're starting a new company, you want to get to monopoly.

Monopolies have a large share of the market, how do you get to a large share of the market? You start with a small market and you take over the whole market and then over time you find ways to expand that market in concentric circles. The first mistake is going after a giant market on day 1. That's evidence that you somehow haven't defined your categories, which means there is going to be too much competition in one way or another.

"You want to be a one-of-a-kind company. You want to be the only player in a small ecosystem. You don't want to be the fourth online pet food company. You don't want to be the tenth solar panel company. You don't want to be the hundredth restaurant in your zone." -- Peter Thiel

The first very unreasonable idea is to go after small markets, markets that are so small that people often don't even think that they make sense. That's where you get a foothold and then if those markets can expand, you can scale into a big monopoly business. There are always very unique businesses that are doing something that has not been done before and ends up having the potential to be a monopoly.

The last mover advantage

One way to think of Peter’s fourth direction is through the idea that most of the value in these companies exists far in the future. If you do a discounted cash flow analysis of the business, you'll need to consider the following. Look at all the profit streams, have a growth rate, the growth rate to be higher than the discount rate so most of the value survives far in the future.

Growth is something you can measure in the here and now, you can always track that. The question of whether a company will or will not be around a decade from now, is actually what dominates the value equation and that's a qualitative thing.

And so if we go back to the idea about characteristics of monopoly, the proprietary technology, network effects, economies of scale, you can think of these characteristics as ones that exist at a moment in time where you capture a market as it is and take it over but you also want to think if these things are going to last over time.

So there's a time dimension to all these characteristics. Network effects get more robust, and so if you have a network business it's often one that can become a bigger and stronger monopoly over time.

History of innovation

There are some very interesting perspectives on the whole history of innovation in technology and science. We've lived through 300 years of incredible technological progress in many different domains. Steam engines to railways, the telephone, refrigeration, household appliances, the computer revolution, aviation, all different areas of technological innovation. Then there's sort of a comparable thing to say about science where we've lived through centuries of enormous amounts of innovation in science as well.

To build the future we need to challenge the dogmas that shape our view of the past. That doesn’t mean the opposite of what is believed is necessarily true, it means that you need to rethink what is and is not true and determine how that shapes how we see the world today. As Peter Thiel says, “The most contrarian thing of all is not to oppose the crowd but to think for yourself“. -- Process Expert Tip

Because "X" and "Y" are independent variables, some of these things can be valuable innovations, but the people who invent them and come up with them, do not get rewarded for this. You need to create X dollars in value and you capture Y percent of X. We live in a culture where it's very hard to get people to buy anything that's super complicated and takes very long to build. We shouldn't rationalize that way. It's worth understanding this better.

Psychology of competition

The idea of Peter’s last direction is that the psychology of competition is for losers. It’s always a provocative way to title something because it's in our nature to think losers are the ones who are not good at competing. It's not the case that we don't understand this monopoly-competition dichotomy. It's because people lie about it, it's distorted, the history of innovation deliberates it in all these very strange ways.

Competition is for losers. Winners too, but statistically speaking, it’s mostly losers” - @perlhack

It's an intellectual blind spot, where we find ourselves very attracted to competition, and in one form or another, we find it reassuring if other people do these things. There is always this question about competition as a form of validation, where we go for things that lots of other people are going for. It's not that there is the wisdom of crowds, it's not that lots of people are trying to do something, but because that is the best proof of being valuable.

Therefore, so much of people's identities get wrapped up in winning these competitions that they somehow lose sight of what is important and what is valuable. Competition doesn't make you better at whatever it is that you're competing at because when you do it, you're comparing yourself with the people around you. But this way, you're figuring out how to beat the people next to you, how to do better than whatever it is they're doing, so you will get better at that. Don't always go through the tiny little door that everyone's trying to rush through, go around the corner and go through the vast gate that nobody is taking.

Starting a business is difficult, and building a successful firm necessitates several sacrifices. If you're looking for a team of mobile experts that would help you take your idea and transform it into a user-validated mobile app, get in touch, we would love to help!


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