Competition is for losers — Xero investor Peter Thiel

If you want to create and capture lasting value, look to build a monopoly, says Peter Thiel in an intriguing, contrarian essay for The Wall Street Journal (adapted from his new book, Zero to One: Notes on Start Ups, or How to Build the Future).

The Californian-based Thiel is best known as the first outside investor in Facebook. The billionaire was also the co-founder of Paypal and Palantir, and is a major investor in both Xero and Vend.

Investors and entrepreneurs usually decry monopolies, of course. When a new competitor arrives, it's always inevitably labelled good for the market. It will keep them on their toes. They relish the fight.

Thiel takes the opposite tack:

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business.

How much of the world is actually monopolistic? How much is truly competitive? It is hard to say because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it is easy to perceive only small differences between them. But the reality is much more binary than that. There is an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize.

The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth.

Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.

And he wraps up by saying:

Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

Tolstoy famously opens "Anna Karenina" by observing: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite. All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.

And he's got a lot more to say, besides. Check out his full essay here.