# Peter Thiel, 'Competition is for Losers' (Stanford CS183B, Lecture 5, October 2014)

- Speaker: Peter Thiel
- Event: Stanford CS183B 'How to Start a Startup', Lecture 5: 'Competition is for Losers'
- Date: October 2014
- Length: 50 min 16 s
- Video URL: https://www.youtube.com/watch?v=5_0dVHMpJlo ; course page: https://startupclass.samaltman.com/courses/lec05/
- Slides: None. Thiel talks and draws a few diagrams on a whiteboard.
- Transcript source: Whisper (faster-whisper, model medium) on the archive.org mirror. Blake Masters' published notes are paraphrase, not transcript, so they were not used for quotes. Timestamps match the YouTube upload.
- Corrections: Corrections applied to the machine output: 'today speaks' to 'idée fixe' (00:25), the phrase Thiel uses and that every published summary of the lecture records; 'diluted' to 'deluded' (29:35).
- Format: `[mm:ss]` is the time the line starts in the source recording. Machine transcript: expect small word errors; quotes used in the analysis were checked against the published text where one exists.

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[00:01] Today's speaker is Peter Thiel.
[00:08] Peter was the founder of PayPal and Palantir and
[00:11] Founders Fund and has invested in most of
[00:14] the tech companies in, in Silicon Valley.
[00:16] And he's going to talk about strategy and competition.
[00:19] Thank you for coming, Peter.
[00:20] Awesome.
[00:20] Thanks, Sam, thanks for inviting me.
[00:23] Thanks for, for having me.
[00:25] I, I sort of have a, I have a single
[00:29] idée fixe that I'm completely obsessed with on
[00:33] the business side, which is that if you're starting a company,
[00:36] if you're the founder, entrepreneur starting a company,
[00:39] you always want to aim for monopoly.
[00:41] And that, and you want to always avoid competition.
[00:46] And so hence competition is for
[00:49] losers, something we'll be talking about today.
[00:54] I'd like to, I'd like to start by saying something
[00:57] about the basic idea of when you start one of these companies,
[01:04] how you go about creating value.
[01:06] And there's this question, what makes a business valuable?
[01:09] And I wanna suggest that there's basically a very simple formula
[01:14] that you have a valuable company if two things are true.
[01:20] Number one, that it creates x dollars of value for the world.
[01:25] And number two, that you capture Y% of X.
[01:29] And, and the critical thing that that I think people
[01:33] always miss in this sort of analysis is that X and
[01:36] Y are completely independent variables.
[01:39] And so X can be very big,
[01:42] Y can be very small, X can be of intermediate size.
[01:46] And if Y is reasonably big,
[01:48] you can still get a very big business.
[01:50] So to create a valuable company,
[01:52] You have to basically both create something of value and
[01:55] capture some fraction of the value of what you've created.
[02:00] And sort of just to, just to illustrate this as a,
[02:04] as a contrast there's, if you sort of compare the US
[02:09] airline industry with a company like Google on search.
[02:14] If you sort of measure by the size of these industries,
[02:18] you could, you could say that airlines are still
[02:20] more important than search.
[02:21] and just measure it, say, by revenues.
[02:23] There's 195 billion in domestic revenues in 2000, 2012.
[02:30] Google had just north of 50 billion.
[02:32] And so, and certainly, sort of on some intuitive level,
[02:36] if you said, if you were given a choice and said,
[02:38] well, do you want to get rid of all air travel, or
[02:41] do you want to get rid of your ability to use search engines?
[02:43] The intuition would be that air travel is something
[02:46] that's more important than search.
[02:47] And this is, of course, just the domestic numbers.
[02:48] If you looked at this globally,
[02:51] airlines are much, much bigger than searcher than Google is.
[02:57] But the profit margins are quite a bit less.
[03:00] They were marginally profitable in 2012.
[03:03] I think the entire 100 year history of the airline industry,
[03:06] the cumulative profits in the US have been approximately zero.
[03:10] Companies make money, they episodically go bankrupt,
[03:12] they get recapitalized, and you sort of cycle and repeat.
[03:16] And this is reflected in the combined market
[03:19] capitalization of the, of the airline industry is maybe something of the US
[03:24] airline industry, something like a quarter that of Google.
[03:27] So, so you have, you have a search engine much,
[03:31] much smaller than, than air travel, but much more valuable.
[03:34] And I think this, this reflects these very different valuations on x and y.
[03:40] So you know, if we look at perfect competition you know,
[03:47] There are sort of, there's some pros and
[03:49] cons to the world of perfect competition.
[03:52] On a high level, it's always,
[03:55] this is what you study in econ one.
[03:57] It's always, it's easy to model,
[03:59] which I think is why econ professors like talking about
[04:01] perfect competition.
[04:03] It somehow is efficient,
[04:04] especially in a world where things are static,
[04:06] because you have all the consumer surplus gets
[04:08] captured by everybody.
[04:10] And politically, it's what we're told is good in our
[04:13] society, that you want to have competition, and
[04:16] This is somehow a good thing.
[04:18] Of course, there are a lot of negatives.
[04:20] It's, it's generally not that good if you're,
[04:21] you're you're involved in anything that's hyper competitive.
[04:25] Because you often don't make money.
[04:26] I'll come back to this a little bit later.
[04:28] So, so I think at one end of the spectrum,
[04:31] you have industries that are perfectly competitive.
[04:34] And at the other end of the spectrum,
[04:37] you have things that I would say are monopolies.
[04:39] And, and they're, you know,
[04:42] they're much stable longer term businesses.
[04:44] have more capital, and if you get a creative monopoly for
[04:49] inventing something new, I think it's symptomatic of
[04:52] having created something really valuable.
[04:55] And so I do think this, the sort of the extreme binary
[05:01] view of the world I always articulate is that there
[05:03] are exactly two kinds of businesses in this world.
[05:06] There are businesses that are perfectly competitive and
[05:08] there are businesses that are monopolies.
[05:10] And there's shockingly little that is in between.
[05:14] And this dichotomy is not understood very well,
[05:17] because people are constantly lying
[05:21] about the nature of the businesses they're in.
[05:24] And this is why, this is, in my mind,
[05:25] this is the most important,
[05:26] it's not necessarily the most important thing in business,
[05:28] but I think it's the most important business idea
[05:30] that people don't understand,
[05:32] that there are just these two kinds of businesses.
[05:34] And so let me say a little bit about
[05:36] the lies that people tell.
[05:38] And so, you basically, the basic,
[05:42] if you sort of imagine that there was a spectrum
[05:44] companies from perfect competition to monopoly.
[05:47] The, the apparent differences are quite small,
[05:51] because the people who have monopolies pretend not to.
[05:55] They will basically say, you know, and it's because you don't
[05:58] want to get regulated by the government.
[06:00] You don't want the government to come after you.
[06:01] So you will never say that you have monopolies.
[06:03] So anyone who has a monopoly will pretend
[06:06] that they're in incredible competition.
[06:08] And on the other end of the spectrum,
[06:10] if you are incredibly competitive, and
[06:13] If you're in some sort of business where you will never
[06:15] make any money, you'll be tempted to tell a lie that
[06:20] goes in the other direction, where you will say that you're
[06:22] doing something unique that is somehow less competitive than
[06:27] it looks because you will want to differentiate,
[06:32] you'll want to try to track capital or something like that.
[06:35] So if the monopolists pretend not to have monopolies,
[06:38] the non-monopolists pretend to have monopolies,
[06:40] the apparent difference is very small.
[06:42] Whereas the real difference, I would submit, is actually quite big.
[06:46] And so there's this distortion that happens because of the lies people
[06:50] tell about their businesses.
[06:52] And the lies are sort of in these opposite directions.
[06:55] Let me drill a little bit down further on the way these lies work.
[07:01] And so the basic
[07:07] lie you tell as a non-monopoly is that we're in a very small market.
[07:12] The basic lie you tell as a monopoly is that the market
[07:15] you're in is much bigger than it looks.
[07:17] And so, and so typically, if you want to think of this in
[07:21] sort of set theoretic terms, you could say that a monopoly
[07:24] tells a lie where you describe your business as
[07:29] the union of these vastly different markets and
[07:33] the non-monopolist describes it as the intersection.
[07:36] So that in effect, if you're a non-monopolist,
[07:41] You will rhetorically describe your market as super small.
[07:45] You're the only person in that market.
[07:47] If you have a monopoly, you will describe it as super big,
[07:51] and there's lots of competition in it.
[07:54] So some examples of how this works in practice.
[07:58] So I always use restaurants as the example of a terrible business.
[08:02] And this is always sort of my ideas.
[08:04] Capitalism and competition are antonyms.
[08:07] Capital is someone who accumulates capital.
[08:09] world of perfect competition is a world where all
[08:10] the capital gets competed away.
[08:13] So you're opening a restaurant business,
[08:15] no one wants to invest because you just lose money.
[08:17] So you have to tell some idiosyncratic narrative and
[08:20] you'll say something like, well,
[08:22] we're the only British food restaurant in Palo Alto.
[08:24] So it's British, Palo Alto, and of course,
[08:28] that's too small a market because people may be able to
[08:31] drive all the way to Mountain View or even Menlo Park.
[08:34] And there probably are no people who eat nothing but
[08:37] British food, at least no people are still alive.
[08:39] And so, so that is, that's, that's a sort of
[08:44] a fictitiously narrow market.
[08:47] There's, there's sort of a Hollywood version of this,
[08:50] where the way movies always get pitched is, you know,
[08:53] okay, it's like a college football star, you know,
[08:58] joins an elite group of hackers to to catch
[09:02] the shark that killed his friend, sorry.
[09:07] And so, that's, now that is a movie that has not yet been made.
[09:10] But, but, but the question is, is, is that the right category?
[09:17] Or is the correct category, it's just another movie.
[09:20] In which case, you know, there are lots of those.
[09:22] It's super competitive, incredibly hard to make money.
[09:25] No one ever makes money in Hollywood doing movies.
[09:27] It's really, really hard.
[09:30] And so you always have this question about, does the intersection, does,
[09:34] is it real, does it make sense, does it have value that one should ask?
[09:37] And of course, there are startup versions of this where you, and
[09:40] the sort of the bad, really bad versions.
[09:43] You just take a whole series of buzzwords, sharing mobile,
[09:46] social apps, you combine them, and you have some kind of narrative.
[09:50] And whether or not that's a real business or
[09:52] not is generally a bad sign.
[09:55] So it's almost this pattern recognition.
[09:57] When you have this rhetoric of this sort of intersections it generally
[10:03] does not work, the something of somewhere is really mostly just
[10:07] nothing of nowhere, it's like the Stanford of North Dakota.
[10:12] One of a kind, but it's not Stanford.
[10:16] So let's look at the opposite.
[10:17] The opposite lie is if you are, let's say the search
[10:24] company that's down the street from here and has about a
[10:27] happy 66% market share and is, you know,
[10:31] is completely dominant in the search market.
[10:34] Google almost never describes itself as a search engine these days.
[10:41] And instead, it describes itself in all these different ways.
[10:44] So it sometimes says it's an advertising company.
[10:47] So if it was search, you'd say, wow, it has this huge market share.
[10:52] That's really, really crazy.
[10:53] It's like an incredible monopoly.
[10:55] It's a much more robust monopoly than Microsoft ever had in the 90s.
[11:00] Maybe that's why it's making so much money.
[11:01] But if you, if you say it's an advertising market,
[11:06] you could say, well, there's search advertising is $17 billion.
[11:10] And that's part of online advertising, which is much bigger.
[11:15] And then, you know, all US advertising is bigger.
[11:18] And then by the time you get to global advertising,
[11:21] that's close to $500 billion.
[11:23] And so you're talking about 3.5%.
[11:26] So a tiny part of, of this much larger market.
[11:32] Or if you don't want to be an advertising company,
[11:35] you can always say that you're a technology company.
[11:39] And so the technology market is something
[11:50] like a $1 trillion market.
[11:52] And the narrative that you tell as Google in the technology
[11:55] market is, well, we're competing with all the car
[11:58] companies with our self-driving cars.
[12:01] We're competing with Apple on TVs and iPhones.
[12:05] We're competing with Facebook.
[12:06] We're competing with Microsoft on office products.
[12:10] We're competing with Amazon on cloud services.
[12:13] And so we are in this giant technology market
[12:16] where there's competition in every direction you look.
[12:19] And no, we're not the monopoly
[12:21] the government's looking for.
[12:22] And we should not get regulated in any way
[12:24] whatsoever.
[12:25] And so I think one has to always be super aware
[12:28] that there are these very powerful incentives to distort
[12:33] the nature of these markets one way or the other.
[12:37] So the evidence of narrow markets in the tech industry
[12:43] is if you basically just, if you look at sort of the,
[12:49] some of the big tech companies, Apple, Google,
[12:51] Microsoft, Amazon, they've just been building up cash
[12:57] for year after year, and you have these incredibly high
[13:00] profit margins.
[13:02] And I would say that one of the reasons the tech industry
[13:06] in the US has been so successful financially
[13:11] is because it's prone to creating all these monopoly
[13:14] like businesses.
[13:16] And it's reflected by the fact that these companies just
[13:20] accumulate so much cash, they don't even
[13:22] know what to do with it beyond a certain point.
[13:25] And so, let me say a few things about how to build a monopoly.
[13:33] And I think one of the sort of very counter-intuitive ideas that
[13:39] comes out of this monopoly thread is that you want to go after small markets.
[13:46] If you're a startup, you want to get to a monopoly.
[13:51] You're starting a new company, you want to get to monopoly.
[13:53] Monopolies, you have a large share of a market.
[13:56] How do you get to a large share of a market?
[13:59] You start with a really small market, and
[14:01] you take over that whole market, and then over time,
[14:04] you find ways to expand that market in concentric circles.
[14:09] And the thing that's always a big mistake is going after
[14:12] a giant market on day one, because that's typically
[14:16] evidence that you somehow haven't defined the categories correctly.
[14:21] And it's, it normally means that there's going to be
[14:23] too much competition in one way or another.
[14:26] And so I think almost all the successful companies in
[14:30] Silicon Valley had some model of starting with small markets and expanding.
[14:36] And, you know, if you take Amazon, you start with,
[14:41] you start with, you know, just a bookstore.
[14:44] We have all the books in the world.
[14:46] So it's, it's a, it's a better bookstore than
[14:48] anybody else has in the world when it starts in the 90s.
[14:51] It's online.
[14:52] There's things you can do you can't do before.
[14:54] And then you gradually expand into all sorts of different
[14:56] forms of e-commerce and other things beyond that.
[15:01] You know, eBay.
[15:02] You start with Pez dispensers.
[15:04] You move on to Beanie Babies.
[15:07] And eventually it's all these different auctions for
[15:11] all these sorts of different goods.
[15:13] And what was very counterintuitive about,
[15:16] what's very counterintuitive about many of these
[15:17] companies is they often start with markets that are so
[15:20] small that people don't think, they don't think that they're
[15:24] valuable at all when, when you get started.
[15:28] The, the PayPal version of this was was, you know,
[15:32] we started with with power sellers on eBay,
[15:36] which was about 20,000 people.
[15:38] When, when we first saw this happening in December of 99,
[15:41] January 2000, right after we launched, there was a sense
[15:45] that that these were all it was such a small market,
[15:48] it was terrible, we thought these were terrible
[15:50] customers to have, it's just people selling junk on the Internet.
[15:53] Why in the world do we want to be going after this market?
[15:56] But there was a way to get a product that was much better for
[16:00] everybody in that market.
[16:02] You could, and we got to something like 25,
[16:04] 30% market penetration in two or three months.
[16:08] And you got some lock in, you got brand recognition,
[16:11] and you're able to build the business from there.
[16:13] So I always think these very small markets are quite underrated.
[16:19] The Facebook version of this I always give is that
[16:21] the initial market at Facebook was 10,000 people at Harvard.
[16:26] It went from 0 to 60% market share in 10 days.
[16:29] That was a very auspicious start.
[16:32] The way this gets analyzed in business schools is always,
[16:35] that's ridiculous, it's such a small market,
[16:37] it can't have any value at all.
[16:38] And so I think the business school analysis of
[16:41] Facebook early on, or of PayPal early on, or
[16:44] of eBay early on, is that the markets were perhaps so
[16:48] small as to have almost no value.
[16:51] And they, they would have had little value had they stayed
[16:54] small, but it turned out there were ways to then
[16:56] grow them concentrically, and that's what made them,
[16:59] that's what made them so valuable.
[17:01] Now I think the opposite version of this is always
[17:04] where you have super big markets, and and I,
[17:08] there's so much, so many different things that went
[17:10] wrong with all the clean tech companies in the last
[17:12] decade, but but one, one theme that ran through almost
[17:17] all of them, was they all started with massive markets.
[17:21] And every clean tech PowerPoint presentation that one saw in
[17:24] the years 2005 to 2008, which was sort of the clean tech bubble
[17:28] in Silicon Valley, started with we're in the energy market.
[17:32] We're in a market that's measured in hundreds of
[17:34] billions or trillions of dollars.
[17:36] And then once you're sort of a minnow in a vast ocean,
[17:42] that's not a good place to be.
[17:43] That means that you have tons of competitors and
[17:46] You don't even know who all the competitors are.
[17:48] And so you want to be, you know, you want to be a one of
[17:51] a kind company where it's the only one in a small ecosystem.
[17:55] You don't want to be the fourth online pet food company.
[17:58] You don't want to be the tenth a thin film solar panel company.
[18:01] You don't want to be the 100th restaurant in Palo Alto.
[18:04] Your restaurant industry is a trillion dollar industry.
[18:06] So if you do a market size analysis,
[18:08] you conclude restaurants are a fantastic business to go into.
[18:11] And it's often large markets,
[18:14] Large existing markets typically mean that you have tons
[18:17] of competition, very, very hard to differentiate.
[18:21] So the first very counter-intuitive idea is to go
[18:26] after small markets, often markets that are so small,
[18:30] people don't even notice them.
[18:31] They don't think that they make sense.
[18:33] That's where you get a foothold.
[18:34] And then if those markets are able to expand,
[18:37] you can scale into a big monopoly business.
[18:40] A second sort of, there's sort of several different
[18:47] characteristics of these monopoly businesses that I like to focus on.
[18:52] And there's probably no sort of single formula to it.
[18:56] And I always think that in technology, there's always a sense that
[19:01] the history of technology is such that every moment happens only once.
[19:05] And so the next Mark Zuckerberg won't build a social network.
[19:09] the next Larry Page won't be building a search engine,
[19:12] the next Bill Gates won't be building an operating system.
[19:15] And if you're copying these people,
[19:17] you're not learning from them.
[19:18] But it's, it's, and so there is always these very unique
[19:22] businesses that are doing something that's not been
[19:25] done before end up end up having the potential to be a monopoly.
[19:30] If you're, you know, the, the opening,
[19:32] the opening line in Anna Karenina is that all happy
[19:36] companies, sorry, all happy families,
[19:38] All happy families are alike.
[19:40] All unhappy families are unhappy in their own special way.
[19:44] And the opposite is true in business,
[19:45] where I think all happy companies are different
[19:48] because they're doing something very unique.
[19:50] All unhappy companies are alike because they
[19:53] fail to escape the essential sameness that is competition.
[19:56] And so, so one, one sort of characteristic of
[19:59] a monopoly technology company is some sort of proprietary technology.
[20:05] My sort of crazy, somewhat arbitrary rule of thumb
[20:08] you want to have a technology that's an order of magnitude
[20:12] better than the next best thing.
[20:14] So Amazon had over ten times as many books.
[20:16] I mean, it's maybe not that high tech, but
[20:17] you figure out a way to sell ten times as many books in
[20:19] an efficient online way.
[20:21] You know, PayPal, the alternative for
[20:23] PayPal was using was using checks to send money on eBay.
[20:29] It took seven to ten days to clear.
[20:30] PayPal could do it more than ten times as fast.
[20:33] So you want to have some sort of very very powerful
[20:37] improvement in some order, maybe an order of magnitude
[20:42] improvement on some key dimension.
[20:45] Of course, if you actually come with something totally new,
[20:48] it's just like an infinite improvement.
[20:51] So I would say the iPhone was the first smartphone that
[20:54] worked, and so that's maybe not infinite,
[20:57] but it's definitely an order of magnitude
[21:00] or more of an improvement.
[21:01] So I think the technology is designed
[21:04] to give you a massive delta over, over the next,
[21:08] the next best thing.
[21:11] I think, I think there often are network effects that can kick in,
[21:15] that really help.
[21:16] The thing that's very, and these, these lead to monopolies over time.
[21:19] The thing that's very tricky about network effects is they're often,
[21:24] they're often very hard to get started.
[21:27] And so, so even though everyone understands how valuable they are,
[21:30] there's always this incredibly tricky question.
[21:32] Why is it valuable to the first person who's doing something?
[21:36] Economies of scale, if you have something with very high fixed costs,
[21:41] very low marginal costs, that's typically a monopoly like business.
[21:46] And then, then there's this thing of, of branding, which is sort of
[21:50] like just this idea that gets lodged in people's brains.
[21:54] I, I never quite understand how branding works.
[21:57] So I never invest in companies where it's just about branding.
[21:59] But it is, I think, a real phenomenon that creates real value.
[22:05] I think one of the things, I'm going to come back to this a little bit
[22:08] towards the end, but one of the things that's very striking is that software
[22:12] businesses are often, are for some reason very good at some of these things.
[22:17] They're especially good at the economies of scale part,
[22:20] because the marginal cost of software is zero.
[22:23] And so if you get something that works in software,
[22:26] It's often significantly better than the existing solution.
[22:31] And then you have these tremendous economies of scale.
[22:33] And you can scale fairly quickly.
[22:35] So even if the market starts small, you can grow your business quickly enough
[22:40] to stay at the same size as the growing market and
[22:45] maintain the sort of monopoly power.
[22:48] Now, the critical thing about these monopolies is it's not enough
[22:53] to have a monopoly for just a moment.
[22:56] The critical thing is to have one that lasts over time.
[23:00] And so, you know, the Silicon Valley is always
[23:01] the sort of idea that you want to be the first mover.
[23:04] And I, I always think it's, it's in some ways
[23:07] the better framing is you want to be the last mover.
[23:09] You want to be the last company in a category.
[23:12] Those are the ones that are really valuable.
[23:14] Microsoft was the last operating system,
[23:16] at least for many decades.
[23:18] Google is the last search engine.
[23:20] Facebook will be valuable if it turns out to be
[23:22] the last social networking site.
[23:24] And one way to, one way to think of this last mover value
[23:30] is this idea that most of the value in these companies
[23:33] exists far in the future.
[23:36] If you do sort of a discounted cash flow analysis of
[23:38] a business, you look at, you have sort of all these
[23:40] profit streams, you have a growth rate,
[23:43] the growth rate's much higher than the discount rate.
[23:45] And so most of the value exists far in the future.
[23:48] I did, I did this exercise at PayPal in March of 2001.
[23:53] We had been in business for about 27 months.
[23:56] And and we sort of had, you know,
[23:59] the growth rate was 100% a year.
[24:00] We were discounting future cash flows by about 30%.
[24:03] And it turned out that about three quarters of the value of
[24:07] the business as of 2001 came from cash flows in years 2011 and beyond.
[24:13] And and whenever you do the math on any of these tech companies,
[24:16] you get to an answer that's something like that.
[24:18] So if you are trying to analyze any of the tech companies in Silicon
[24:21] AirBnB, Twitter, Facebook, any emerging Internet companies,
[24:27] all the ones in Y Combinator.
[24:29] The math tells you that three quarters,
[24:32] 85% of the value is coming from cash flows in years 2024 and beyond.
[24:38] It's very, very far in the future.
[24:40] And so one of the things that we always overvalue in Silicon Valley
[24:44] is growth rates, and we undervalue durability.
[24:48] Because growth is something you can measure in the here and
[24:51] now, and you can always track that very precisely.
[24:55] The question of whether a company is still going to be
[24:57] around a decade from now, that's actually what dominates
[25:00] the value equation, and that sort of is a much more
[25:03] qualitative sort of a thing.
[25:06] And so if we went back to this idea of these
[25:09] characteristics of monopoly, proprietary technology,
[25:12] network effects, economies of scale, you can think
[25:17] of these characteristics as ones that exist at
[25:19] the moment in time where you capture market and take it over.
[25:23] But you also want to think about,
[25:24] are these things going to last over time?
[25:27] And so there's a time dimension to all these characteristics.
[25:30] So network effects often have a great time element where,
[25:33] as the network scales,
[25:34] the network effects actually get more robust.
[25:36] And so if you have a network effect business,
[25:38] that's often one that can become a bigger and
[25:43] stronger monopoly over time.
[25:46] Proprietary technology is always a little bit of a tricky one.
[25:49] So you want something that's order of magnitude better than
[25:53] the state of the art in the world today.
[25:56] And that's how you get people's attention.
[25:57] That's how you initially break through.
[25:59] But then you don't want to be superseded by somebody else.
[26:02] And so there are all these areas of innovation where
[26:05] there was tremendous innovation, but no one made any money.
[26:08] So, you know, describe manufacturing in the 1980s.
[26:12] You could do a better, build a better describe than anybody else.
[26:16] You could take over the whole world.
[26:18] And two years later, someone else would come along and
[26:20] replace yours.
[26:22] And in the course of 15 years,
[26:23] you got vastly improved disk drives.
[26:26] So it had great benefit to consumers.
[26:28] But it didn't actually help the people who started
[26:31] these companies.
[26:32] And so there's always this question about
[26:34] having a huge breakthrough in technology, but
[26:37] then also being able to explain why yours will be
[26:41] the last breakthrough, or at least the last
[26:44] breakthrough for a long time.
[26:45] Or will you make a breakthrough and
[26:46] And you can keep improving on it at a quick enough
[26:49] pace that no one can ever catch up.
[26:51] So if you have a structure of the future where
[26:56] there's a lot of innovation and other people will
[26:59] come up with new things in the thing you're working on.
[27:02] That's great for society.
[27:04] It's actually not that good for your business, typically.
[27:09] And then economies of scale, we already talked about.
[27:11] So I think this last mover thing is very critical.
[27:15] always tempted, you know, I don't want to overdo the chess analogies, but
[27:19] you know, the first mover in chess is someone who plays white.
[27:22] White is about a one-third of a pawn advantage, so
[27:24] there's a small advantage to going first.
[27:27] You want to be the last mover who, who wins the game.
[27:30] And so, so there's always the Capa Blanca world champion
[27:34] chess champion Capa Blanca line.
[27:35] You must begin by studying the end game.
[27:38] And, and I do think that's why, I wouldn't say that's the only thing
[27:41] you should study.
[27:42] I think this sort of perspective of asking these questions,
[27:45] why will this still be the leading company 10, 15,
[27:48] 20 years from now, is a really critical one to try to think through.
[27:55] Let me sort of, I want to sort of go in two slightly other
[27:59] directions with this monopoly versus competition idea.
[28:02] And I think, so I think this is the central idea in my mind for
[28:08] business, for starting business, for thinking about them.
[28:11] And there are some very interesting perspectives,
[28:14] I think, it gives on the whole, you know,
[28:16] on the whole history of innovation and
[28:19] technology and science, because, you know, we've,
[28:22] we've lived through, we've lived through, you know,
[28:26] 250, 300 years of incredible technological progress in,
[28:31] you know, many, many different domains, you know,
[28:33] steam engine to railways to telephones, refrigeration,
[28:39] Household appliances, you know, the computer revolution,
[28:45] aviation, all sorts of different areas of technological innovation.
[28:49] And then there's sort of analogous thing that one can say about science,
[28:52] where we've lived through centuries of,
[28:55] of enormous amounts of innovation in, in, in science as well.
[28:59] And and the, the thing that I think people always miss when they
[29:04] think about these things is is that because X and
[29:08] Y or independent variables.
[29:11] Some of these things can be extremely valuable innovations.
[29:15] But the people who invent them, who come up with them,
[29:18] do not get rewarded for this.
[29:20] And certainly, if you go back to, you need to create X dollars in value.
[29:24] You capture Y% of X.
[29:26] I would suggest that the history of science has generally been one where Y
[29:31] is 0% across the board.
[29:33] The scientists never make any money.
[29:35] They're always deluded into thinking that they live in a just
[29:38] universe that will reward them for their work and for their inventions.
[29:42] And this is probably the fundamental delusion that
[29:45] scientists tend to suffer from in our society.
[29:49] And even in technology, there are sort of many different areas of technology
[29:54] where there were great innovations that created tremendous value for society.
[29:59] But people did not actually capture that much of the value.
[30:06] And so I think there is this sort of whole history of science and
[30:11] technology that can be told from the perspective of
[30:14] how much value was actually captured.
[30:17] And and certainly there are entire sectors where
[30:22] people didn't capture anything.
[30:23] So you, you're the smartest physicist of the 20th century.
[30:27] You come up with special relativity.
[30:28] You come up with general relativity.
[30:30] You don't get to be a billionaire.
[30:32] You don't even get to be a millionaire.
[30:34] It just, it just somehow doesn't work that way.
[30:37] The railroads, incredibly valuable.
[30:39] Most of them just went bankrupt,
[30:41] because it was too much competition.
[30:43] Wright brothers, you fly the first plane,
[30:46] you don't make any money.
[30:47] And so I think there is sort of a structure to
[30:49] these industries that's that's very important.
[30:52] And I think the the thing that's actually rare
[30:55] are the success cases.
[30:56] Most, so it's actually, when you really think about
[30:59] the history in this, in this 250 year sweep,
[31:02] It's, why is almost always zero percent.
[31:04] It's always zero in science.
[31:06] It's almost always in, in technology.
[31:08] And so it's very rare where people made money.
[31:11] You know, the early, the late 18th, early 19th century,
[31:14] the first industrial revolution was the textile mills.
[31:17] You had the steam engine, you sort of automated things.
[31:19] And you had these relentless improvements that people
[31:21] improved efficiency of textile factories, of manufacturing
[31:25] generally, at a clip of five to seven percent every year,
[31:29] year after year, decade after decade.
[31:31] had 60, 70 years of tremendous improvement from 1780 to 1850.
[31:38] But even in 1850, most of the wealth in Britain
[31:42] was still held by the landed aristocracy.
[31:45] The workers didn't make that much.
[31:47] The capitalists didn't make that much either.
[31:48] It was all competed away.
[31:49] There were hundreds of people running textile factories.
[31:53] It was an industry that just the structure
[31:56] of the competition prevented people from making any money.
[32:00] And so I think there are, in my mind, there probably are only
[32:04] two broad categories in the entire history of the last 250
[32:07] years, where people have actually come up with new things
[32:11] and made money doing so.
[32:13] One is these sort of vertically integrated complex
[32:17] monopolies, which people did build
[32:19] in the second industrial revolution
[32:21] at the end of the 19th and start of the 20th century.
[32:24] And so this was like Ford.
[32:26] It was the vertically integrated oil companies,
[32:27] like Standard Oil.
[32:29] And what these vertically integrated monopolies
[32:32] typically required was this very complex coordination.
[32:35] You got a lot of pieces to fit together in just the right way.
[32:39] When you assembled it, you had a tremendous advantage.
[32:42] This has actually done surprisingly little today.
[32:44] And so I think this is sort of a business form
[32:47] that, when people can pull it off, is very valuable.
[32:51] It's typically fairly capital intensive.
[32:54] We live sort of in a culture where
[32:56] It's very hard to get people to buy into anything that's
[33:00] super complicated and takes very long to build.
[33:03] But I, you know, when I sort of think about my colleague Elon
[33:06] Musk from PayPal's success with Tesla and SpaceX, I think the key
[33:12] to these companies was the complex,
[33:14] vertically integrated monopoly structure they had.
[33:17] So if you sort of look at Tesla or
[33:19] SpaceX, if you ask, you know, was there sort of a single breakthrough?
[33:23] I mean, they certainly innovated on a lot of dimensions.
[33:26] I don't think there was a single 10X breakthrough in
[33:29] battery storage or, you know, maybe working on some things on
[33:32] rocketry, but they hadn't, there was no sort of single
[33:35] massive breakthrough, but what, what was really impressive
[33:38] was integrating all these pieces together and, and
[33:42] doing it in a way that was more vertically integrated
[33:44] than most of their competitors.
[33:45] So, Tesla, you also integrated the car distributors
[33:48] so they wouldn't steal all the money as, as happened
[33:51] with the rest of the car industry in the US.
[33:53] For SpaceX, you basically pulled in all the subcontractors
[33:58] where most of the large aerospace companies have single
[34:02] source subcontractors that are able to sort of charge
[34:05] monopoly profits and make it very hard for
[34:08] the integrated aerospace companies to make money.
[34:10] And so vertical integration, I think, is sort of a,
[34:13] a very underexplored modality of, of technological progress
[34:17] that people would, would do well to look at more.
[34:21] And then I think there is something about software itself
[34:25] that's very, very powerful.
[34:27] Software has these incredible economies of scale,
[34:30] these low marginal costs.
[34:32] And there is something about the world of bits,
[34:34] as opposed to the world of atoms,
[34:35] where you can often get very fast adoption.
[34:38] And the fast adoption is critical to capturing and
[34:41] taking over markets.
[34:42] Because even if you have a small market,
[34:44] if the adoption rate is too slow, there'll be enough time for
[34:47] other people to enter that market and compete with you.
[34:50] Whereas if you have a small to mid-sized market and
[34:53] have a fast adoption rate, you can take over this market.
[34:56] And so, and so I think this is one of the reasons Silicon
[34:58] Valley has done so well and why software has been
[35:02] this phenomenal industry.
[35:03] And what I, what I would suggest what I want to leave
[35:06] you with is there are sort of these different rationalizations
[35:09] people give for why certain things work and
[35:13] why certain things don't work.
[35:15] And I think these rationalizations always obscure
[35:17] this question of creating x dollars in value and capturing y percent of x.
[35:23] So the science rationalization we're always told,
[35:26] is that the scientists aren't interested in making money.
[35:28] They're doing it for charitable reasons and
[35:30] that you're not a good scientist if you're motivated by money.
[35:33] And I'm not even saying people should always be motivated by money or
[35:36] something like this, but I, I think we should,
[35:39] we should be a little bit more critical of this as a rationalization.
[35:42] We should ask, is this a rationalization to
[35:46] obscure the fact that y equals 0% and the scientists are operating in this
[35:51] sort of world where all the innovation is effectively
[35:55] competed away and they can't capture any of it directly.
[35:59] And then the software distortion that often happens is because people
[36:03] are making such a vast fortunes in software, we infer that this is
[36:07] the most valuable thing in the world being done full stop.
[36:11] And so if people at Twitter make billions of dollars,
[36:14] it must be that Twitter is worth far more than anything Einstein did.
[36:19] And and and what that sort of rationalization tends to obscure is again
[36:24] that X and Y are independent variables and there are these businesses where
[36:27] you capture a lot of X and there are others where you don't.
[36:30] And so and so I do think I do think the history of innovation has been
[36:35] this this history where the the the microeconomics,
[36:39] the structure of these industries has mattered a tremendous amount.
[36:42] And when and there is sort of this story where some people
[36:48] have made vast fortunes because they were in industries with
[36:50] the right structure and other people made nothing at all
[36:54] because they were in these sort of very competitive things.
[36:58] And we shouldn't just rationalize that way.
[37:00] I think it's worth understanding this better.
[37:02] And then finally, let me come back to this sort of
[37:07] overarching theme for this talk,
[37:08] this competition is for losers idea.
[37:11] which is always this provocative way to, to title things.
[37:14] Because we always think of the losers as the people who
[37:18] are not good at competing.
[37:20] We think of the losers as the people who are slow on the sports,
[37:24] on the track team in high school.
[37:26] Or who do a little bit less well on the standardized tests and
[37:29] don't get into the right schools.
[37:31] And so we always think of losers as people who can't compete.
[37:35] And I want us to really rethink and, and revalue this and
[37:39] consider whether it's possible that competition itself is off.
[37:43] That we, we, we're sort of, it's not just the case that we don't
[37:46] understand this monopoly competition dichotomy intellectually.
[37:50] So, so I've been talking about why,
[37:52] why you wouldn't understand it intellectually.
[37:53] Because people lie about it, it's distorted.
[37:56] We have all these the history of innovation rationalizes
[38:00] what's happening in all these very, very strange ways.
[38:03] But I think it's more than just an intellectual blind spot.
[38:05] I think it's also a psychological blind spot where
[38:07] we find ourselves very, very attracted to competition in one form or another.
[38:13] We find it reassuring if other people do things.
[38:16] The word ape already in the time of Shakespeare meant both primate and
[38:19] imitate, and there is something about human nature that's deeply mimetic,
[38:24] imitative, ape-like, sheep-like, lemming-like, herd-like.
[38:28] And it's this very, very problematic thing that we need to
[38:33] always think through and try to overcome.
[38:35] And there is always this question about competition as a form of validation,
[38:42] where we go for things that lots of other people are going for.
[38:46] And it's not that there is wisdom in crowds.
[38:48] It's not when lots of people are trying to do something
[38:51] that that's proof of it being valuable.
[38:53] I think it's when lots of people are trying to do something
[38:55] that is often proof of insanity.
[38:58] There are 20,000 people a year who move to Los Angeles to become movie
[39:01] stars, about 20 of them make it.
[39:04] I think the Olympics are a little bit better because you
[39:06] have a, you know, you can sort of figure out pretty
[39:09] quickly whether you're good or not.
[39:10] So it's, there's a little bit less of a deadweight loss to society.
[39:13] You know, you're, you're, you're the sort of educational experience at a place.
[39:20] The, the, the pre-Stanford educational experience.
[39:23] There's always sort of a non-competitive characterization.
[39:25] I think most of the people in this room had machine guns.
[39:28] They were competing with people with bows and arrows.
[39:29] So it wasn't exactly a parallel competition when you were in junior
[39:33] in high school and high school, there's always a question,
[39:36] does the tournament make sense as you keep going?
[39:38] And so there is always this question,
[39:41] if people go on to grad school or post-doctoral educations,
[39:46] does the intensity of the competition really make sense?
[39:48] There's the classic Henry Kissinger line that
[39:53] describing his fellow faculty at Harvard that the battles
[39:58] were so ferocious because the stakes were so
[40:00] small, describing sort of academia.
[40:02] And you sort of think on one level,
[40:04] this is a description of insanity.
[40:06] Why would people fight like crazy
[40:08] when the stakes are so small?
[40:10] But it's also, I think, simply a function
[40:12] of the logic of the situation.
[40:14] When it's really hard to differentiate yourself
[40:16] from other people, when the objective differences really
[40:20] are small, then you have to compete ferociously
[40:24] to maintain a difference of one sort or another that's
[40:28] often more imaginary than real.
[40:30] There's always sort of the personal version of this that
[40:33] I, I tell where I was sort of hyper, hyper tracked.
[40:37] I, you know, my eighth grade junior high school yearbook,
[40:39] one of my friends wrote in, you know, I,
[40:40] I know you'll get into Stanford in four years as, as a sophomore.
[40:44] Sort of went into, went to Stanford four years later,
[40:47] the end of high school, went to Stanford Law School.
[40:50] You know, ended up at a big law firm in New York where,
[40:55] from the outside everybody wanted to get in,
[40:56] on the inside everybody wanted to leave.
[40:58] And you had, and it was this very strange dynamic where after I sort of realized this
[41:05] was maybe not the best idea, and I left after seven months and three days, you know, one
[41:11] of the people down the hall from me told me, it's really reassuring to see you leave,
[41:15] Peter.
[41:16] I had no idea that it was possible to escape from Alcatraz, which of course all you
[41:19] had to do was go out the front door and not come back.
[41:23] that so much of people's identities got wrapped up in
[41:27] winning these competitions that they somehow lost sight of
[41:31] what was important, what was valuable.
[41:33] You know, competition does make you better at whatever it is
[41:37] that you're competing on.
[41:38] Because when you're competing,
[41:39] you're comparing yourself with the people around you.
[41:42] You're figuring out, how do I beat the people next to me?
[41:44] How do I do somewhat better at whatever it is they're doing?
[41:47] And you will get better at that thing.
[41:49] I'm not, I'm not questioning that.
[41:50] I'm not denying that.
[41:52] But it often comes at this tremendous price that you
[41:56] stop asking some bigger questions about what's truly
[41:58] important and truly valuable.
[42:01] And so I would say that don't always go through
[42:04] the tiny little door that everyone's trying to
[42:05] rush through.
[42:06] Maybe go around the corner and
[42:08] go through the vast gate that no one's taking.
[42:10] Thank you very much.
[42:11] I guess we have time for, do you want to take
[42:16] a few questions or, sorry?
[42:23] Oh yeah, people want to take,
[42:25] I'll take a few questions, we have a few minutes time.
[42:28] Yeah, go ahead.
[42:29] Since, as you mentioned earlier, often monopolies and
[42:32] overcompetition often look similar because the narrators
[42:34] people tell, or the narrators we tell ourselves.
[42:36] Do you have any ways to easily determine the difference
[42:40] when you're looking at an idea or evaluating your own idea?
[42:43] Well, I'd say the question I always try to focus on is
[42:46] what is the actual market?
[42:47] So not what's the narrative of the market, because you
[42:49] can always tell a fictional story about a market that's
[42:52] much bigger or much smaller, but what is the,
[42:54] what is the real objective market?
[42:56] So it's always, yeah, you always try to figure it out and
[42:59] you realize people have incentives to powerfully distort these things.
[43:03] Yeah?
[43:04] So, which of the aspects of monopolies have you mentioned when
[43:06] you say that software companies like Google, Excel have?
[43:11] Well, they have network effects with the ad network.
[43:15] They had proprietary technology that gave them the initial lead,
[43:18] because they had the page rank algorithm,
[43:20] which was sort of an order of magnitude better
[43:22] than any other search engine.
[43:24] have economies of scale because of the need to store,
[43:28] you know, all these different sites.
[43:30] And at this point, you have brands.
[43:31] So Google has all four.
[43:32] Maybe, maybe the proprietary technology is somewhat weaker
[43:35] at this point, but definitely it had all four and
[43:37] maybe three and a half out of four now.
[43:40] Yeah.
[43:40] How does this apply to volunteer and second,
[43:43] what's it like?
[43:44] Second is what?
[43:45] What's with the iPhone?
[43:47] Oh, this is, that's a, that's a,
[43:49] this is sort of a set of companies that are doing
[43:51] different copycat payment systems on, on mobile phones or square.
[43:55] is PayPal, they just have sort of different shapes.
[43:58] That's how they differentiate themselves.
[43:59] One is a triangle, one is a square.
[44:00] And so, you know, maybe at some point,
[44:04] the apes will run out of shapes or something like that.
[44:06] But I think, Palantir, we started with a focus on
[44:10] the intelligence community, which is a small sub market.
[44:14] You had a proprietary technology that used a very,
[44:16] very different approach, where it was focused on
[44:21] the human computer synthesis rather than the substitution,
[44:28] which I think is the dominant paradigm.
[44:29] So there's a whole set of things I would say on the,
[44:31] on the market approach and the, on the proprietary technology.
[44:36] Yes.
[44:38] We have design thinking methodology and
[44:40] lean startup thinking which is used to mitigate
[44:45] risk by not creating things that people don't want.
[44:48] But how do young innovators have inspiration to create
[44:51] complex systems that must be done.
[44:54] Can you repeat the question?
[44:55] Yeah, so the question is what I think about lean startups,
[44:58] iterative thinking where you get feedback from people
[45:02] versus complexity that may not work.
[45:05] So I am personally quite skeptical of all the lean
[45:08] startup methodology.
[45:09] I think the really great companies did something
[45:13] that was sort of somewhat more of a quantum improvement
[45:17] that really differentiated them from everybody else.
[45:20] They typically did not do massive customer surveys.
[45:25] The people who ran these companies sometimes not always
[45:27] suffered from mild forms of Asperger's,
[45:29] so they were not actually that influenced,
[45:31] not that easily deterred by what other people thought
[45:33] or told them to do.
[45:35] So I do think we're way too focused on iteration
[45:39] as a modality and not enough on trying
[45:42] to have a virtual ESP link with the public
[45:47] and figuring it out ourselves.
[45:49] I would say that, let me see, I would say that the I'm not quite,
[45:55] the risk question, I think, is always a very tricky one because there are,
[45:59] you know, there, there, it's, it's not, it's often,
[46:03] I think it's often the case that you don't have enough time
[46:06] to really mitigate risk.
[46:07] If you're going to take enough time to figure out what people want,
[46:11] you often will have missed the boat by then.
[46:14] And and then, of course, there's always the risk of,
[46:17] of doing something that's that's not that significant or meaningful.
[46:22] So, you know, you, you could say a track in in law school
[46:26] is a low risk track from one perspective.
[46:29] It may still be a very high risk track in the sense that maybe,
[46:32] you know, have a high risk of not doing something meaningful with your life.
[46:35] So, we have to think about risk in these, in these very complicated way.
[46:39] I think risk is for this very complicated concept.
[46:42] Yes?
[46:43] You started with the last mover advantage, but
[46:44] then doesn't that imply that there's already
[46:46] competition to begin with on the chess piece, on the chess board?
[46:51] Yeah, so there's always this terminology thing.
[46:53] So I would, I would say that there are,
[46:56] there are categories in which people sort of are bundled together.
[47:00] I would say the monopoly businesses were, in,
[47:03] in effect they, they really were a big first mover in some sense.
[47:07] You could say, you could say Google was not the first search engine.
[47:10] There were other search engines before.
[47:11] But on one dimension,
[47:13] they were dramatically better than everybody else.
[47:14] So they were the first one with page rank,
[47:17] with sort of a automated approach.
[47:19] Facebook was not the first social networking site.
[47:22] My friend Reid Hoffman started one in 1997.
[47:25] They called it Social Net, so
[47:27] they already had the name Social Networking in the name of
[47:30] their company seven years before Facebook.
[47:33] Their idea was that it was going to be this virtual
[47:35] cyberspace where I'd be a dog and you'd be a cat, and
[47:37] we'd have all these different rules about how we'd interact
[47:39] with each other in this virtual alternate reality.
[47:42] Facebook was the first one to get real identity.
[47:44] So it was, so I'd say, I hope Facebook would be
[47:47] the last social networking site.
[47:49] It was the first one in, in a very important dimension.
[47:51] People often would not think of it as the first,
[47:53] because they'd sort of lump all these things together.
[47:57] Okay, one more question.
[47:58] Let's take one here.
[47:59] If your theoretic is someone who worked at
[48:02] Golden Sacks out of college and left out of six months
[48:05] and is now studying computer science at Stanford.
[48:07] How would you recommend rethinking sort of that
[48:10] You know, I don't, I don't have a, I don't have a great.
[48:20] I'm not great at the psychotherapy stuff, so I don't,
[48:23] I don't quite know how to, I don't quite know how to,
[48:25] how to solve this.
[48:26] That there are these, you know, there are these very
[48:29] odd studies they've done on people who go to business school.
[48:32] There's one they've done at Harvard Business School,
[48:34] where it's sort of the anti-Asperger personality.
[48:38] You have people who are super extroverted,
[48:40] generally have low convictions, few ideas.
[48:44] And you have sort of a hothouse environment.
[48:45] You put all these people in for two years.
[48:48] And at the end of it, they systematically end up,
[48:51] the largest cohort systematically ends up doing the wrong thing.
[48:53] They try to catch the last wave.
[48:55] In 1989, everyone at Harvard tried to work for Mike Milken.
[48:58] It was one or two years before he went to jail for
[49:00] all the junk bond stuff.
[49:02] They were never interested in Silicon Valley or tech except for
[49:04] when they timed the dot com bubble peaking perfectly.
[49:09] They did, and then, you know, 05 to 07 was housing,
[49:12] private equity, stuff like this.
[49:14] So, so I do think, I do think this tendency for
[49:18] us to see competition as validation is, is very deep.
[49:24] I don't think there's some, any sort of easy
[49:26] psychological formula to, to avoid it, so I don't,
[49:29] I don't quite know how to, what sort of therapy to,
[49:32] to recommend, but my first, my first starting point,
[49:37] which is only like, it's maybe 10% of the way,
[49:39] is to never underestimate how big a problem it is.
[49:42] We always think this is something that afflicts other people.
[49:44] So it's easy for me to point to people in business schools,
[49:47] or people at Harvard, or people on Wall Street.
[49:49] I think it actually does afflict all of us to a very profound degree.
[49:52] We always think of advertising as things that work on other people.
[49:55] Who are all these stupid people who fall for all those ads on TV?
[49:59] They obviously work to some extent, and
[50:01] work to a disturbing extent on all of us and it's something we all should work to overcome.
[50:06] Thank you very much.