Lecture 5 - Competition is for Losers (Peter Thiel)

1. SPSpeaker0:00

   [background chatter] All right. Good afternoon. Uh, today's speaker is Peter Thiel. Peter was the founder of PayPal and Palantir and Founders Fund, and has invested in, uh, most of the tech companies in, in Silicon Valley. And he's going to talk about strategy and competition. Thank you for coming, Peter.

2. PTPeter Thiel0:20

   Awesome. Thanks. Uh, Sam, thanks for inviting me. Thanks for, for having me. Uh, I, I sort of have a-- I have a single idée fixe that I'm completely obsessed with in, um, on, on the business side, which is that, uh, if you're starting a company, if you're the founder, entrepreneur starting a company, you always want to aim for monopoly. And, um, and that, uh, and you want to always avoid competition. And so, uh, hence, uh, competition is for losers, uh, something we'll be talking about today. I'd like to, um, I'd like to start by saying something about, um, the, the basic idea of, of when you start one of these companies, um, how you go about, uh, creating value. And there's this question, what makes a business valuable? And I wanna, I wanna suggest that there's basically a very simple, uh, very simple formula that, um, um, you, you have a valuable company if two things are true. Uh, number one, that it creates X dollars of value for the world, and number two, that you capture Y percent of X. And, and the critical thing that, uh, that I think people always miss in this sort of analysis is that X and Y are completely independent variables. And so, um, X can be very big, Y can be very small. X can be of intermediate size, and if Y is, is reasonably g-big, you can still get a very big business. So to create a valuable company, you have to basically, uh, both create something of value and capture some fraction of the value of what you've created. And sort of just to, just to illustrate, uh, this as a, as a contrast, um, there's-- If you sort of compare the, uh, U.S. airline industry with a company like, uh, Google on search, um, if you sort of measure by the size of these industries, you could, you could say that airlines are still more important than search, if you just measure it, say, by revenues. It was a hundred and ninety-five billion in, uh, domestic revenues in, uh, two thousand, uh, two thousand and twelve. Google had, uh, just north of fifty billion. Um, and this, and so, and certainly, sort of on some intuitive level, if you said, uh, if you were given a choice and said, "Well, do you wanna get rid of air, all air travel, or do you wanna get rid of your ability to use search engines?" The intuition would be that air travel is something that's more important than search. And this is, of course, just the domestic numbers. If you looked at this globally, um, airlines are much, much bigger than, um, than, uh, than, than, than, than search or than Google is. But, uh, but the profit margins are quite a bit less. Uh, you know, they were marginally profitable in twenty twelve. Uh, I think the entire hundred-year history of the airline industry, the cumulative profits in the U.S. have been approximately zero. The companies make money, they episodically go bankrupt, they get recapitalized, and you sort of cycle and, and repeat. And this is reflected in, you know, the, the combined market capitalization of the, of the airline industry is maybe, uh, something, um, of the U.S. airline industry, something like a quarter that of Google. So, so, uh, you have s- you have a search engine much, much smaller than, than air travel, but much more valuable. And I think this, this reflects these very different, uh, valuations on X and Y. So, um, you know, if we look at perfect competition, um, you know, there are sort of, there are some pros and cons to the world of perfect competition. Um, on a high level, uh, uh, it's always, um, this is what you study in Econ one. It's always, it's easy to model, which I think is why econ professors like talking about perfect competition. Um, it somehow is efficient, especially in a world where things are static because you have all the consumer surplus gets captured by everybody. And, uh, and politically, it's, uh, what, uh, what we're, what we're told is good in our society, that you, you wanna have competition, and this is somehow a good thing. Um, of course, there are a lot of negatives. Uh, it's, it's generally not that good if you're, you're, um, you're involved in anything that's hypercompetitive, um, because you often don't make money. I'll come back to this a little bit later. So, uh, so I think at one end of the spectrum, you have, uh, industries that are perfectly competitive. And at the other end of the spectrum, um, you have things that, um, I would say are monopolies. And, um, and they're, you know, they're much stable, longer-term businesses. You have more capital. Uh, and, um, and if you get a creative monopoly for inventing something new, I think it's symptomatic of having created something, something really valuable. Um, and so I do think this, you know, the, the, the sort of the, the, the extreme binary view of the world I, I always articulate is that there are exactly two kinds of businesses in this world. There are businesses that are perfectly competitive, and there are businesses that are monopolies. And, um, there's shockingly little that is in between. And, uh, this dichotomy is not understood very well because, uh, people, uh, are constantly lying about the nature of the businesses they're in. Um, and this is why, this is-- in my mind, this is the most import-- It's not necessarily the most important thing in business, but I think it's the most important business idea that people don't understand, that there are just these two kinds of businesses. And so let me say a little bit about the lies that people tell. And so you basically, um, the basic, uh, if you sort of imagine that there was a spectrum of companies from perfect competition to monopoly, um, the, um, the apparent differences are quite small because the people who have monopolies pretend not to. They will basically say, uh, you know, and it's because you don't wanna get regulated by the government. You don't want the government to come after you. So you will never say that you have monopoly. So anyone who has a monopoly will pretend that they're in incredible competition.And on the other end of the spectrum, if you are incredibly competitive, um, and if you're in some sort of business where you will never make any money, um, you'll be tempted to tell a lie that goes in the other direction, where you will say that you're doing something unique, um, that, um, is, is somehow, ah, less competitive than it looks because, um, because you wanna, you will wanna differentiate, you'll wanna try to attract capital or something like that. So if the monopolists pretend not to have monopolies, the non-monopolists pretend to have monopolies, the apparent difference is very small, whereas the real difference, I would, I would submit, is, is actually quite big. And so there's this distortion that happens because of the lies people tell about their businesses, and the lies are sort of in these, these opposite direction. Let me, let me drill a little bit down further on the, uh, the way these lies work. And so, um, you know, the, the, the basic, uh, lie you tell as a non-monopoly is that we're in a very small market. The basic lie you tell as a monopoly is that the market you're in is much bigger than it looks. And so, um, and so typically, if you wanna think of this in sort of set theoretic terms, you could say that a monopoly tells, um, a, a lie where you describe your business as the union of these vastly different markets, and the non-monopolist describes it as the intersection. So that, uh, in effect, um, if you're, if you're a non-monopolist, you will rhetorically describe your market as super small. You're the only person in that market. If you have monopoly, you'll describe it as super big and, um, and there's lots of competition in it. So, uh, some examples of how this, how this works in practice. Uh, so I always use restaurants as the example of a terrible business, and there's always, you know, sort of my idea is that, you know, capitalism and competition are antonyms. Um, capital, someone who accumulates capital. World of perfect competition is a world where all the capital gets competed away. So, uh, you're opening a restaurant business. No one wants to invest because you just lose money, so you have to tell some idiosyncratic narrative, and you'll say something like, "Well, we're the only British food restaurant in Palo Alto." So it's British, Palo Alto, and, uh, and of course that's too small a market because people may be able to drive all the way to Mountain View or even Menlo Park, um, and there probably are no people who eat nothing but British food, at least no people who are still alive.

3. SPSpeaker8:40

   [laughing]

4. PTPeter Thiel8:41

   And so, so that is, um, that's, that's a sort of a fictitiously narrow market. Um, there's, there's sort of a Hollywood version of this where, uh, the way movies always get pitched is, you know, okay, it's like a college football star, you know, uh, joins an elite group of hackers to, um-

5. SPSpeaker9:01

   [laughing]

6. PTPeter Thiel9:02

   ... to catch the shark that killed his friend.

7. SPSpeaker9:04

   [laughing]

8. PTPeter Thiel9:05

   Um, sorry. And so that's tr-- now, that is a movie that has not yet been made.

9. SPSpeaker9:11

   [laughing]

10. PTPeter Thiel9:12

    But, um, but, but the question is, is, is that the right category, or is the correct category it's just another movie? In which case, you know, there are lots of those. It's super competitive, incredibly hard to make money. No one ever makes money in Hollywood, uh, doing movies, or s- j- it's really, really hard. And so you always have this question about does the intersection, does, is it real? Does it make sense? Does it have value that one should ask? And of course, there are startup versions of this where you... And the, the sort of the ba- really bad versions, you just take a whole series of, uh, buzzwords, sharing mobile social apps, you combine them, and you have some kind of a narrative.

11. SPSpeaker9:50

    [laughing]

12. PTPeter Thiel9:50

    And whether or not that's a real business or not, uh, is, is, uh, um, is, it's generally a bad sign. So it's, it's almost this pattern recognition when you have this re- rhetoric of this sort of intersections, um, it, it, it generally does not work. The something of somewhere is really mostly just the nothing of nowhere, and it's like the Stanford of North Dakota.

13. SPSpeaker10:11

    [laughing]

14. PTPeter Thiel10:12

    Uh, one of a kind, but it's not Stanford.

15. SPSpeaker10:14

    [laughing]

16. PTPeter Thiel10:15

    Um, so let's look at the opposite. The opposite lie is, um, if you are, uh, let's say, uh, the, uh, the search, uh, company, uh, that's down the street from here and has about a happy sixty-six percent market share, um, and, uh, is, you know, is completely dominant in the search market, um, Google has not des- de- almost never describes itself as a search engine these days, um, and instead it, uh, it describes itself in all these different ways. So it sometimes says it's an advertising company. So if it was search, you'd say, "Wow, this, this like, it's, it's, it has this huge market share that's really, really crazy. It's, it's like a incredible monopoly. It's much bigger than, it's much, a much more robust monopoly than Microsoft ever had in the nineties. Maybe that's why it's making so much money." Um, but if you, uh, if you say it's an advertising market, you could say, well, there's search advertising is seventeen billion, and that's part of, uh, online advertising, which is much bigger, and then, you know, all US advertising is bigger, and then by the time you get to global advertising, that's close to five hundred billion, and so you're talking about three and a half percent, so, um, a tiny part of, uh, of this much larger market. Um, or, uh, if you don't wanna be an advertising company, you can always say that you're a technology company. Um, and so, um... Sorry. Let me see. Um, and so the, and, and so, um, and, and the technology market is something like a one trillion dollar market, and, uh, the narrative that you tell as Google in the, in the technology market is, um, well, we're competing with, uh, all the car companies with our self-driving cars. We're competing with Apple on TVs and iPhones. Uh, we're competing with Facebook. We're competing with Microsoft on, um, on Office products. We're competing with Amazon on cloud services. And so we are in this giant technology market where there's competition in every direction, uh, you, you look, and, uh, no, we're not the monopoly the government's looking for, and we should not get regulated in any way whatsoever. And so I think one has to always be super aware that there are these, uh, these very powerful incentives to, uh, to distort, uh, the nature of these markets one way or, or the other.So, um, you know, the, the, the evidence of narrow markets in the, uh, in the tech industry is, um, is if you basically just, um, if you look at sort of the, some of the big tech companies, Apple, Google, Microsoft, Amazon, um, they just, um, they've just been building up cash for, um, year after year, and you have these incredibly high profit margins. And I would, I would say that the, that one of the reasons the tech industry in the US has been, uh, has been so successful financially is because it's, it's prone to creating all these monopoly-like businesses. And that's, that's, um, and it's reflected, uh, by the fact that these companies just accumulate so much cash, they don't even know what, what to do with it beyond a certain point. Um, and so, so let me say, um, let me say a few things about, uh, about how to, how to build a monopoly. And I think, uh, I think the-- one of the sort of very counterintuitive ideas that comes out of this monopoly, uh, thread is that, um, you want to s- to go after small markets. If you're a startup, um, you know, you wanna get to a monopoly. You're starting a new company, you wanna get to monopoly. Um, monopoly is you have a large share of a market. How do you get to a large share of a market? You start with a really small market, and you take over that whole market, and then, uh, and then over time, you find ways to expand that market in, in concentric circles. And, uh, the thing that's always a big mistake is going after a giant market on, uh, on day one, because that's typically evidence that, um, that you somehow haven't defined the categories correctly, that the-- and it's, it normally means that there's going to be too much competition in one way or another. And so I think almost all the, uh, successful companies, uh, in Silicon Valley had some model of starting with small markets and expanding. And, you know, if you take Amazon, you start with, you start with, you know, just, um, a bookstore. We have all the books in the world, so it's, it's a, it's a, it, it's a better bookstore than anybody else has in the world when it starts in the nineties. It's online. There's things you can do you can't do before. And then you gradually expand into all sorts of different forms of e-commerce and other things beyond that. Um, you know, eBay, you start with Pez dispensers, you move on to Beanie Babies, and eventually, uh, it's, it's all these different, um, auctions for all these sorts of different goods. Um, and, uh, and what was very counterintuitive about, what's very counterintuitive about many of these companies is they often start with markets that are so small that people don't think, um, they don't think that they're, uh, valuable at all when, when you get started. Um, the, the PayPal version of this was, uh, was, you know, we started with, uh, with power sellers on eBay, which was about twenty thousand people. When, when we first saw this happening in December of ninety-nine, January two thousand, right after we launched, uh, there was a sense that, uh, that these were all, um, it was such a small market. It was terrible. We thought these were terrible customers to have. It's just people selling junk on the Internet. Why in the world do we wanna be going after this market? But, um, but you, you know, you-- there was a way to get a product that was much better for everybody in that market. You could, um, and we got to something like twenty-five, thirty percent, you know, market penetration in two or three months, and you got some walk-in, you got brand recognition, and you're able to, to build the business from there. So, um, so I always think these, um, these, these very small markets are, are quite underrated. Uh, the Facebook version of this I always give is that, uh, you know, the initial market at Facebook was ten thousand people at Harvard. It went from zero to sixty percent market share in ten days. That was a very auspicious start. Um, the way this gets analyzed in business schools is always, um, "That's ridiculous. It's such a small market, it can't have any value at all." And so I think the business school analysis of Facebook early on or of, uh, PayPal early on or of eBay early on is that the markets were perhaps so small as to have, uh, almost no value. Uh, and they, they would have had little value had they stayed small, but it turned out there were ways to then grow them concentrically, and, uh, that's what made them, uh, that's what made them so valuable. Um, now I think the opposite version of this is always where you have super big markets, and, um, and I-- there's so much, so many different things that went wrong with all the clean tech companies in the last decade, but, uh, but one, one theme that ran through almost all of them was they all started with massive markets. And every clean tech PowerPoint presentation that one saw in the years two thousand and five to two thousand and eight, which was sort of the clean tech bubble in, in Silicon Valley, started with, "We're in the energy market. We're in a market that's measured in hundreds of billions or trillions of dollars." And, um, and then, you know, once you're sort of a, a minnow in a vast ocean, um, that's not a good place to be. That means that you have tons of competitors, and you don't even know who all the competitors are. And so you wanna be, you know, you wanna be a one-of-a-kind company where it's the only one in a, a small ecosystem. You don't wanna be the fourth online pet food company. You don't wanna be the tenth, uh, thin film solar panel company. You don't wanna be the hundredth restaurant in Palo Alto. Um, you know, restaurant industry is a trillion-dollar industry, so if you do a market size analysis, you conclude restaurants are a fantastic business to go into, and it's often large markets, large existing markets typically mean that you have, uh, tons of competition, very, very hard to, uh, to differentiate. So the first very counterintuitive intu-- uh, idea is, is to go after small markets, often markets that are so small people don't even notice them. They don't think that they make sense. That's where you get a foothold, and then, um, and then if those markets are able to expand, you can, uh, scale, uh, into a, a, a big monopoly business.Um, you know, it's, um, a second, uh, sort of, there's sort of several different, uh, characteristics of these monopoly businesses, um, that I like to, um, focus on, and, and there's probably no, no sort of single formula to it. And I, I always think that, uh, that in technology, there's always a sense that, you know, the history of technology is such that every, every moment happens only once. And so, you know, the next Mark Zuckerberg won't build a social network, the next, uh, uh, the next Larry Page won't be building a search engine, the next, uh, Bill Gates won't be building an operating system. And if you're copying these people, you're not learning from them. But it's, it's-- And so, um, there is always, um, these very unique businesses that are doing something that's not been done before end up, um, end up having the potential to be a monopoly. If you're-- You know, the, the, the opening, the opening line in, um, Anna Karenina is that, "All happy companies..." Sorry, "All happy families, all happy families are alike, all unhappy families are unhappy in their own special way." And the opposite is true in business, where I think all happy companies are different because they're doing something very unique. All unhappy companies are alike because they fail to escape the essential sameness that is competition. And so, so one, one sort of characteristic of a monopoly technology company is some sort of proprietary technology. Um, my sort of crazy, somewhat arbitrary rule of thumb is you want to have a technology that's an order of magnitude better than the next best thing. So Amazon had over ten times as many books. I mean, it's maybe not that high tech, but you figure out a way to sell ten times as many books in an efficient online way. You know, PayPal, the alternative for PayPal was using, um, was using, uh, uh, checks to s- send money on eBay, took seven to ten days to clear. PayPal could do it more than ten times as fast. So you wanna have some sort of very, uh, very powerful improvement in some, um, on, on, in some order, maybe an order of magnitude improvement on some key dimension. Um, of course, you know, if you, if you actually come with something totally new, um, it's, it's j- it's just like an infinite improvement. So I would say the, the iPhone was the first smartphone that worked, and so that's, you know, that's like may-maybe in-- maybe not infinite, but it's sort of definitely an order of magnitude or more of an improvement. So I think, uh, the, the technology is designed to give you a massive delta over, over the next, the next best thing. I think, um, I think there often are network effects that can kick in that, uh, that really help. The thing that's very-- Um, and these, these lead to monopolies over time. The thing that's very tricky about network effects is, uh, they're often, uh, they're often very hard to get started. And so, um, so even though everyone understands how valuable they are, uh, there's always this incredibly tricky question, why is it valuable to the first person who's doing something? Um, economies of scale, uh, if you have something that-- with very high fixed costs, very low marginal costs, uh, that's typically a monopoly-like business. And then, um, then there's this thing, uh, of, of branding, uh, which is sort of like this, uh, th-this idea that gets lodged in people's brains. I, I never quite understand how branding works, uh, so I never invest in companies where it's just about branding. But it is, I think, a, a real phenomenon that, uh, that creates, uh, that creates real value. I think one of the things, um, and I'm gonna come back to this a little bit, uh, towards the end, but one of the things that's very striking is that software businesses are often, um, are for some reason, uh, very good at some of these things. They're especially good at the economies of scale part because, uh, the marginal cost of software is zero. And so if you get something that works in software, um, it's often significantly better than the existing solution, and then you have these tremendous economies of scale, and you can scale fairly quickly. So even if the market starts small, um, you can grow your business quickly enough to, uh, stay, um, stay at the same size as the growing market and, uh, and maintain the sort of monopoly, uh, power. Now, the critical thing about these monopolies is, um, is it's, it's not enough to have a monopoly for just a moment. The critical thing is to have one that lasts over time. Um, and so, you know, in Silicon Valley, there's always this sort of idea that you wanna be the first mover, and I, I always think it's, it's-- in some ways, um, the better framing is you wanna be the last mover. You wanna be the last company in a category. Those are the ones that are really valuable. Microsoft was the last operating system, at least for many decades. Uh, Google is the last search engine. Facebook will be valuable if it turns out to be the last, uh, social networking site. And, um, and one way to, one way to think of this, uh, last mover, uh, value is this idea that most of the value in these companies exists far in the future. Um, if you do sort of a discounted cash flow analysis of a business, you look at, you have sort of all these profit streams, you have a growth rate. The growth rate's much higher than the discount rate, and so most of the value exists far in the future. I did, I did this exercise at PayPal in March of two thousand and one. We had been in business for about twenty-seven months, and, um, and we sort of had, you know, the growth rate was a hundred percent a year. We were discounting future cash flows by about thirty percent. And it turned out that about three-quarters of the value of the business as of two thousand and one came from cash flows in years two thousand and eleven and beyond. And, um, and whenever you do the math on any of these tech companies, you get to an answer that's something like that. So if you are trying to analyze any of the tech companies in Silicon Valley, Airbnb, Twitter, uh, Facebook, um, any emerging internet companies, all the ones in Y Combinator, um, the math tells you that three quarters, eighty, eighty-five percent of the value is coming from cash flows in years two thousand and twenty-four and beyond. It's very, very far in the future. And, uh, and so one of the things that, uh, we always overvalue in Silicon Valley is growth rates, and we undervalue durability, because, uh, growth is something you can measure in the here and now, and you can always track that very precisely. Um, the question of whether a company's still gonna be around a decade from now, that's actually what-What dominates the value equation, and that sort of is a much more, ah, qualitative sort of a thing. And so if, if we, um, if we went back to this idea of these characteristics of monopoly, ah, proprietary technology, network effects, economies of scale, um, um, you can think of these, these characteristics as ones that exist at a moment in time where you capture a market and take it over, but you also wanna think about are these things going to last over time? And so there's a time dimension to all these characteristics. So network effects often have a great time element where as the network scales, the network effects actually get more robust. And so if you have a network effect business, that's often one that, ah, um, can become a, um, a, a bigger and stronger monopoly over time. Ah, proprietary technology is always a little bit of a tricky one. So you want something that's order of magnitude better than, ah, the state-of-the-art in the world today, and that's how you get people's attention, that's how you initially break through, but then, um, you don't wanna be superseded by somebody else. And so there are all these areas of innovation where there was tremendous innovation, but no one made any money. So, ah, you know, describe manufacturing in the nineteen-eighties. Um, you could im-- you could do a better dis-- build a better describe than anybody else, you could take over the whole world, and two years later, someone else would come along and replace yours. And in the course of fifteen years, you got vastly improved disk drives, so it had great benefit to consumers, but, um, it didn't actually help the people who started these companies. And so there's always this, ah, question about having a huge breakthrough in technology, but then also being able to say, explain why, ah, yours will be the last breakthrough, ah, or at least the last breakthrough for a long time, or will you make a breakthrough and then you can keep improving on it at a quick enough pace that no one can ever catch up. So if you have a structure of, um, a structure of the future where there's a lot of innovation and other people will come up with new things in the thing you're working on, um, that's great for society. It's, um, it's actually not that good for your business, typically. Um, and then, um, economies of scale, ah, we already talked about. So, so I think, anyway, so I think this last mover thing is, is very critical. I'm always tempted, you know-- Ah, I don't wanna overdo the chess analogies, but, you know, the first mover in chess is someone who plays white. White is about a one-third of a pawn advantage, so there's a small advantage to, ah, going first. You wanna be the last mover, um, who, who wins the game. And so, so there's always the Casablanca, ah, world champion, ah, ah, chess champion Casablanca line, "You must begin by studying the end game." And, ah, and I do think that's, um, why-- I wouldn't say that's the only thing you should study. I think this, ah, this sort of perspective of asking these questions, why will this still be the leading company ten, fifteen, twenty years from now, is a, ah, is a really critical one to, to try to think through. Let me, um, let me sort of, ah, I wanna sort of go in two slightly other directions with this, ah, monopoly versus competition idea. And I think, um, so I, I think this is the, the central idea, ah, in my mind for, for business, for starting business, for thinking about them. And, ah, and there are so-some very, um, interesting perspectives I think it gives on the whole, you know, on the whole history of innovation and technology and science because, um, you know, we've, we've lived through, um, we've lived through, um, you know, two hundred fifty, three hundred years of incredible technological progress in, you know, many, many different domains. Ah, you know, steam engine to railways to telephones, refrigeration, household appliances, um, you know, the computer revolution, aviation, all sorts of different areas of technological innovation. And then there's sort of analogous thing that one can say about science, where, ah, we've lived through centuries of, of enormous amounts of innovation in, in, in science as well. And, um, and the, the thing that I think, um, people always miss when they think about these things is, um, is that, um, because X and Y are independent variables, um, some of these things can be extremely valuable innovations, but, ah, the people who invent them, who come up with them, do not get rewarded for this. And, ah, and certainly, if you go back to, um, you need to create X dollars in value, you capture Y percent of X, I would suggest that the history of science has generally been one where Y is zero percent across the board. The scientists never make any money. Um, they're always deluded into thinking that they live in a just universe that will reward them for their work and for their inventions, and this is probably the fundamental delusion that, ah, that scientists, ah, tend to suffer from in our, in our society. Um, and, and even in technology, there are sort of many different areas of technology where, um, where there were great innovations that created tremendous value for society, but, ah, but people, ah, did not, ah, did not actually capture, ah, that much of the, of the value. And so I think there is this sort of whole, ah, history of, um, science and technology that can be told from the perspective of how much value was actually captured. And, um, and certainly there are entire sectors where people didn't capture anything. So you, you're the smartest physicist of the twentieth century, you come up with special relativity, you come up with general relativity, you don't get to be a billionaire, you don't even get to be a millionaire. Um, it just, it just somehow doesn't work that way. Um, the railroads, incredibly valuable, most of them just went bankrupt because there was too much competition. Um, Wright brothers, um, you fly the first plane, you don't make any money. And so I think there is sort of a structure to these industries that's, ah, that's very important. Um, and I think the, ah, the thing that's actually rare are the success cases. Most of the-- So it's actually, when you, when you really think about the history in this, in this two hundred fifty-year sweepUm, it's unu-- Y is almost always zero percent. It's always zero in science, it's almost always in, in technology, and so it's very rare where people made money. You know, the early, uh, the late, uh, eighteenth, early nineteenth century, the first industrial revolution was the textile mills, you had the steam engine, you sort of automated things, and you had these relentless improvements that people improved efficiency of textile factories, of manufacturing generally at a clip of five to seven percent every year, year after year, decade after decade. You had sixty, seventy years of tremendous improvement from seventeen eighty to eighteen fifty. Um, but even in eighteen fifty, most of the wealth in Britain was still held by the landed aristocracy. Uh, the workers didn't, you know, the workers didn't make that much, the capitalists didn't make that much either. It was all competed away. There were hundreds of people running textile factories. It was an industry that just, uh, um, the structure of the competition prevented people, uh, from, from making any money. Um, and so I think there are... In my mind, there probably are only two broad categories in the entire history of the last two hundred and fifty years where people have actually, uh, come up with new things and made money doing so. Um, one is, uh, these sort of vertically integrated complex monopolies, which people, uh, did build in the second industrial revolution at the end of the nineteenth and start of the twentieth century. And so this was like Ford, it was the vertically integrated oil companies like Standard Oil. Um, and what these, uh, vertically integrated monopolies, uh, typically required was this very complex coordination. You got a lot of pieces to fit together in just the right way. Uh, when you assembled it, you had a, a tremendous advantage. This is actually, uh, done surprisingly little today. And so I think this is sort of a business form that, um, when people can pull it off, is very valuable. It's typically fairly capital intensive. Uh, we live sort of in a, in a, in a culture where it's very hard to get people to buy into anything that's, uh, super complicated and takes very long to build. Uh, but I... You know, when, when I sort of think about my colleague, Elon, uh, Musk from PayPal success with Tesla and SpaceX, uh, I think the key to these companies was the complex, vertically integrated monopoly structure they had. So if you sort of look at Tesla or SpaceX, if you ask, you know, was there sort of a single breakthrough? I mean, they certainly innovated on a lot of dimensions. I don't think there was a single ten X breakthrough, you know, s-- in battery storage or, you know, uh, maybe working on some things on rocketry, but they hadn't... There was no sort of single massive breakthrough. But what was really impressive was integrating all these pieces together and, um, and doing it in a way that was more vertically integrated than most of their competitors. So Tesla, you also integrated the car distributors, so they wouldn't, uh, steal all the money as has happened with the rest of the car industry in the US. Or SpaceX, um, you basically, uh, pulled in all the subcontractors, um, uh, where most of the large, uh, aerospace companies have single source subcontractors that are able to sort of charge, uh, monopoly profits and make it very hard for the integrated aerospace companies to make money. Um, and so, uh, vertical integration, I think, is sort of a, a very underexplored, uh, modality of, of, uh, technological progress that people, uh, would, uh, would do well to look at more. And then I think there is, there is something about software itself that's very, very powerful. Um, software has these incredible economies of scale, these low marginal costs, and there is something about the world of bits as opposed to the world of atoms where you can often get very fast adoption. And, and the fast adoption is critical to capturing and taking over markets, because even if you have a small market, if the adoption rate is too slow, there'll be enough time for other people to enter that market and compete with you. Whereas if you have a small to mid-size market and have a fast adoption rate, you can now take over this market. And so, and so I think this is one of the reasons Silicon Valley has done so well and why, uh, software has been, uh, this phenomenal industry. And what I, what I would suggest, uh, what I w- wanna leave you with is there are sort of these different rationalizations people give for why certain things work and why certain things don't work. And I think these rationalizations always obscure this question of, um, creating X dollars in value and capturing Y percent of X. So the science rationalization, we're always told, is that the scientists aren't interested in making money. They're doing it for charitable reasons, and that you're not a good scientist if you're motivated by money. And I'm not even saying people should always be motivated by money or something like this, but I, I think we should, we should be a little bit more critical of this as a rationalization. We should ask, is this a rationalization, um, uh, to obscure the fact that Y equals zero percent and the scientists are operating in this, uh, in this sort of world where all the, uh, all the innovation is effectively competed away and they can't capture any of it directly? And then the, uh, the software distortion that often happens is because people are making such vast fortunes in software, we infer that this is the most valuable thing, um, in the world being done full stop. And so if people at Twitter make, uh, billions of dollars, it must be that Twitter is worth far more than anything Einstein did. Um, and, um, and, uh, and what that sort of rationalization tends to obscure is again, that X and Y are independent variables and there are these businesses where you capture a lot of X and there are others where you don't. And so, uh, and so I do think, um, I do think the history of innovation has been this, uh, this history where, uh, the, the, the, the microeconomics, the structure of these industries has mattered a tremendous amount and when, um, and, um, and, and, and there is sort of this, this story where some people have made vast fortunes because they were in industries with the right structure and other people, uh, made, uh, nothing at all because, um, because they were in these sort of very competitive things, and we shouldn't just rationalize that away. I think it's worth understanding this better. And then finally, let me come back to thisThis, uh, this sort of overarching theme for this talk, this competition is for losers idea, which, um, is always this provocative way to, to title things because we always think of the losers as the people who are not good at competing. We think of the losers as the people who are, um, slow on the sports te- on the track team in high school, or who do a little bit less well on the standardized tests, um, and don't get into the right schools. And so we always think of losers as people who can't compete. Um, and I want us to really rethink and, and revalue this and consider whether it's possible that competition itself, um, is of- that we, we, we're sort of-- It's not just the case that we don't understand this monopoly competition dichotomy intellectually. So, so I've just sort of been talking about why, why you wouldn't understand it intellectually because, um, people lie about it, it's distorted, we have all these, uh, h- the history of innovation rationalizes what's happened in all these very, very strange ways. But I think it's more than just an intellectual blind spot. I think it's also a psychological blind spot where we find ourselves, you know, very, very attracted to competition in, in one form or another. Um, we find it reassuring if other people do things. The word ape already in the time of Shakespeare meant both primate and imitate, uh, and there is something about human nature that's deeply mimetic, imitative, ape-like, sheep-like, lemming-like, herd-like, um, and it's this very, very problematic, uh, thing that, uh, we need to always think through and, and try to overcome. And, and there is always this question about, um, competition, um, as, as a form of validation where we, we go for things that lots of other people are going for and, um, it's not that there is wisdom in crowds. It's not when lots of people are trying to do something that that's proof of, uh, it being valuable. I think it's when lots of people are trying to do something, that is often, um, that is often proof of insanity. There are twenty thousand people a year who move to Los Angeles to become movie stars. About twenty of them make it. Um, I think the Olympics are a little bit better because you have a, you know, um, you can sort of figure out pretty quickly whether you're good or not, so it's, uh, there's a little bit less of a dead weight loss to society. Um, you know, um-

17. SPSpeaker39:15

    [laughing]

18. PTPeter Thiel39:16

    Um, you know, your, your, the sort of educational experience at a place, uh, the, the, the pre-Stanford educational experience, um, there's always sort of a non-competitive characterization where I think most of the people in this room had machine guns and they were competing with people with bows and arrows, so, um, it wasn't exactly a parallel competition when you were in junior high school and high school. Um, there's always a question, does the tournament make sense as you keep going? And this is, uh, and so, um, there is always this question if people go on to grad school or post, uh, postdoctoral educations, does the intensity of the competition really make sense? There's the, uh, the, you know, classic, uh, Henry Kissinger line that, uh, um, describing his fellow faculty at, at Harvard that the, uh, um, the battles were so ferocious because the stakes were so small, describing sort of academia. And, um, and, and you sort of think on one level this is a description of insanity. You know, why would people fight like crazy when the stakes are so small? But it's also, I think, simply a function of the logic of the situation. When it's impo-- really hard to differentiate yourself from other people, when the differences are, when the objective differences really are small, then, uh, you have to, uh, compete ferociously to maintain, uh, a difference of one sort, uh, or another, um, that's often more imaginary than real. There's always sort of the personal, uh, version of this that I, I tell where, um, you know, I was sort of hyper, hyper-tracked. I, you know, my eighth grade junior high school yearbook, one of my friends wrote in, you know, "I, I know you'll get into Stanford in four years," as a, as a sophomore. Sort of went into s- go into Stanford four years later, uh, at the end of high school. Uh, went to Stanford Law School. Uh, you know, ended up, um, at a big law firm in, uh, New York, uh, where from the outside everybody wanted to get in, on the inside everybody wanted to leave. Um-

19. SPSpeaker40:59

    [laughing]

20. PTPeter Thiel41:00

    And, and you had, um, and it was this very strange dynamic where after I, uh, sort of realized this was maybe not the best idea, um, and I left after seven months and three days, you know, one of the people down the hall from me, uh, told me, um, "It's really reassuring to see you leave, Peter. I had no idea that it was possible to escape from Alcatraz."

21. SPSpeaker41:18

    [laughing]

22. PTPeter Thiel41:18

    Which of course all you had to do was go out the front door and not come back. But, um, but so much of people's identities got wrapped up in, um, in winning, uh, these competitions that, uh, they somehow lost sight of what was important and what was valuable. And you know, competition does make you better at whatever it is that you're competing on because when you're competing, you're, um, comparing yourself with the people around you. You're figuring out, how do I beat the people next to me? How do I do somewhat better at whatever it is they're doing? And you will get better at that thing. I'm not, I'm not questioning that, I'm not denying that. But, um, but it often comes at this tremendous price that, uh, you stop asking some bigger questions about what's truly important and truly valuable. And so I would, I would say that, uh, don't always go through the tiny little door that everyone's trying to rush through, and maybe go around the corner and go through the vast gate that no one's taking. Thank you very much. [clapping] I guess it's time for... Do you wanna take a few questions or?

23. SPSpeaker42:20

    [clapping]

24. SPSpeaker42:20

    Take it online.

25. PTPeter Thiel42:21

    Sorry?

26. SPSpeaker42:21

    Take the questions and then take it online.

27. PTPeter Thiel42:23

    Oh, yeah. Uh, people wanna take, I'll take a few questions since we have a few minutes' time. Yeah, go ahead.

28. SPSpeaker42:28

    Um, since, as you mentioned earlier, often monopolies and perfect competition often look similar because of the narratives people tell or the narratives we tell ourselves. Um, do you have any ways to easily, uh, determine the difference when you're looking at an idea or evaluating your own idea?

29. PTPeter Thiel42:43

    Well, I, I'd say the question I'm, I always try to focus on is what is the actual market? So not what's the narrative of the market, because you can always tell a fictional story about a market that's much bigger or much smaller, but what is the, what is the real objective market? So it's always, yeah, you always try to figure it out, and you realize people have incentives to powerfully distort these things. Yeah. So which of the aspects of monopoly that you mentioned would you say software companies like Google excel at?Um, well, they have, uh, they have network effects with the, the ad network. They had proprietary technology that gave them the initial lead because they had the, uh, the PageRank algorithm, which was, uh, sort of an order of magnitude better than any other search, search engine. You have economies of scale, uh, because of the need to store, you know, all these different, uh, sites, and at this point you have brands. So Google has all four. Maybe, maybe the proprietary technology is somewhat weaker at this point, but definitely it had all four, and maybe three and a half out of four now. Yeah.

30. SPSpeaker43:40

    How does this apply to Palantir and second, what's with like-

Episode duration: 50:16