The Pete Quiñones Show - Pete Reads Peter Thiel's 'Zero to One' - Part 2

Episode Date: March 2, 2024

52 MinutesPG-13Pete continues reading and commenting on Peter Thiel's best-seller, Zero to One. In this second episode, Pete covers chapters 4 and 5: The Ideology of Competition and Last Mover Advantage.Get Autonomy Support Pete on His WebsitePete's PatreonPete's Substack Pete's SubscribestarPete's VenmoPete's Buy Me a CoffeePete on FacebookPete on TwitterBecome a supporter of this podcast: https://www.spreaker.com/podcast/the-pete-quinones-show--6071361/support.

You catch them in the corner of your eye. Distinctive, by design. They move you, even before you drive. The new Cooper plugin hybrid range. For Mentor, Leon, and Terramar. Now with flexible PCP finance and trade-in boosters of up to 2000 euro. Search Coopera and discover our latest offers. Cooper.

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Those Black Friday deals everyone's talking about? They're right here at Beacon South Quarter. That designer's sofa you've been wanting? It's in Seoul, Boe Concept and Rocheburoix. The Dream Kitchen? Check out at Cube Kitchens. Beacon South Quarter Dublin, where the smart shoppers go. Two hours free parking, just off the M50, at 13. It's a Black Friday secret. Keep it to yourself. Ready for huge savings. We'll mark

your calendars from November 28 to 30th because the Liddle Newbridge Warehouse Sale is back. We're talking thousands of your favorite Liddle items all reduced to clear. From home essentials to seasonal must-habs, when the doors open, the deals go fast. Come see for yourself. The Liddle New Bridge Warehouse Sale, 28th to 30th of November. Liddle, more to value. I want to welcome everyone. I want to welcome one to part two of my re-through of Peter Teal's zero to one. Let's jump right into it. In the first episode, I read the preface, zero to one. In chapters one, two, and three, chapter one was the challenge of the future. Chapter two was party like it's 1999. And chapter three is all happy companies are different. Today's episode, we're going to start with chapter four, the ideology of

competition. Have that up on the screen and I'm just going to jump right in. The ideology of competition. Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation and a struggle for survival. So why do people believe that competition is healthy? The answer is that Competition is not just an economic concept or simple inconvenience that individuals and companies must deal with in the marketplace. More than anything else, competition is an ideology, the ideology, that pervades our society and distorts our thinking. We preach competition, internalize its necessity, and enact its commandments. And as a result, we trap ourselves within it, even though the more we compete, the less we gain.

I immediately think when I see we trap ourselves in it. I think about ideology in general. You can pick any ideology you want. Liberalism, progressivism, republicanism, conservatism, libertarianism. As soon as they choose an ideology, they're competing with other people. Instead of just looking at what the problem is, what's the most obvious problem, solve the obvious problem, get the people on our side, and then continue. you down the path with implementing your vision. It works in business and it works in government. This is a simple truth, but we've all been trained to ignore it. Our educational system both

drives our obsession with competition. Grades themselves allow precise measurement of each student's competitiveness. Pupils with the highest marks receive status and credentials. We teach every young person the same subjects in mostly the same ways, irrespective. of individual talents and preferences. Students who don't learn best by sitting still at a desk are made to feel somehow inferior, while children who excel on conventional measures like tests and assignments end up defining their identities

in terms of this weirdly contrived academic parallel reality. And it gets worse as students ascend to higher levels of the tournament. Elite students climb confidently until they reach a level of competition sufficiently intense to beat their dreams out of them. Higher education is the place where people who had big plans in high school get stuck in fierce rivalries with equally small peers over conventional careers like management consulting and investment banking. Management consulting, investment banking.

What do they both have in common? It's a competition. There's thousands of people out there doing it. For the privilege of being turned into conformists, students or their families pay hundreds of thousands of dollars in skyrocketing tuition that continues to outpace inflation. Why are we doing this to ourselves? I wish I had asked myself when I was younger. My path was so tracked that in my eighth grade yearbook, one of my friends predicted accurately that four years later, I would enter Stanford as a sophomore. And after a conventionally

successful undergraduate career, I enrolled at Stanford Law School where I competed even harder for the standard badges of success. The highest prize in a law student's world is unambiguous. Out of tens of thousands of graduates each year, only a few dozen get a Supreme Court clerkship. After clerking on a federal appeals court for a year, I was invited to interview for clerkships with Justice Kennedy and Scalia. My meetings with the justices went well. I was so close to winning this last competition. If only I got the clerkship, I thought, I thought I would be set for life, but I didn't. And at the time, I was devastated. In 2004, after I had built and sold PayPal, I ran into an old friend from law school who

prepared my failed clerkship applications. We hadn't spoken in nearly a decade. His first question wasn't, how are you doing or can you believe it's been so long? Instead, he grinned and asked, so Peter, aren't you glad you didn't get that clerkship? With the benefit of hindsight, we both knew that winning that ultimate competition would have changed my life for the worse. Had I actually clerked on the Supreme Court, I probably would have spent my entire career taking depositions or drafting other people's business deals instead of creating anything new. It's hard to say how much different,

it's hard to say how much would be different, but the opportunity costs were enormous. All Rhodes Scholars had a great future in their past. It's a great line. All Rhodes Scholars had a great future in their past. War and Peace, new section. Professors downplay the cutthroat culture of academia, but managers never tire of comparing business to war.

MBA students carry around copies of Klaus Fitz and Sun Zoo. War metaphors invade our everyday business language. We use headhunters to build up a sales force that will enable us to take a captive market and make a killing. But really, it's competition, not business, that is like war, allegedly necessary, supposedly valiant, but ultimately destructive. If you want to know, people have been asking, what does, what do guys like Peter or Thiel think about war?

Oh, he just answered it for you. Why do people compete with each other? Marx and Shakespeare provide two models for understanding almost every kind of conflict. According to Marx, people fight because they are different. The proletariat fights to bourgeoisie because they have completely different ideas and goals generated for Marx by their very different material circumstances. The greater the differences, the greater the conflict. To Shakespeare, by contrast, all combatants look more or less alike.

It's not at all clear why they should be fighting, since they have nothing to fight about. Consider the opening line from Romeo and Juliet. yet. Two households, both alike, indignity. The two houses are alike, yet they hate each other. They grow even more similar as the feud escalates. Eventually, they lose sight of why they started fighting in the first place. In the world of business, at least, Shakespeare proves the superior guide. Inside a firm, people become obsessed with their competitors for career advancement. Then the firm themselves become obsessed with their competitors in the marketplace amid all the human drama people lose sight of what matters and focus on their rivals instead how human is that where instead of

looking at ourselves and examining ourselves where we compare ourselves to other people instead of just trying to be the best you know the best Pete or the best whoever is listening to this they can be I know it sounds like some self-help bullshit, but hopefully this is starting to realize that some of that does have a lot of value. Let's test the Shakespearean model in the real world. Imagine a production called Gates and Schmidt based on Romeo and Juliet. Montague is Microsoft, Capulet is Google. Two great families run by alpha nerds sure to clash on account of their sameness. With all good tragedy, the conflict seems inevitable, only,

in retrospect. In fact, it was entirely avoidable. These families came from very different places. The House of Montague built operating systems and office applications. The House of Capulet wrote a search engine. What was there to fight about? Lots, apparently. As a startup, each clan had been content to leave the other alone and prosper independently. But as they grew, they began to focus on each other. Montague's obsessed about Capulets, obsessed about Montague's. The result? Windows versus Chrome OS, Bing versus Google search, Explorer versus Chrome, Office versus Docs, and Surface versus Nexus. Just as war costs the Montague's and Capulis their children, it cost Microsoft and Google their dominance. Apple came along and overtook them all. In January 2013, Apple's market capitalization was $500 billion, while Google and

Microsoft combined were worth $467 billion. Just three years before, Microsoft and Google were each more valuable than Apple. War is costly business. It's another thing people have been asking. They see war as being costly. The only war that should be fought is one that absolutely is necessary when people have asked about the PayPal Mafia and whether the future looks like government being run like a startup and get some water.

Rivalry causes us to overemphasize, over-emphasize old opportunities and slavishly copy what has worked in the past. It are the recent proliferation of mobile credit card readers. In October 2010, a startup called Square released a small, white square-shaped product that let anyone with an iPhone swipe and accept credit cards. You catch them in the corner of your eye. Distinctive. By design.

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They're right here at Beacon South Quarter. That designer's sofa you've been wanting? It's in Seoul, Boe Concept and Rocheburoix. The Dream Kitchen? Check out at Cube Kitchens. Beacon South Quarter Dublin, where the smart shoppers go. Two hours free parking just off the M-50. Exit 13. It's a Black Friday secret. Keep it to yourself. It was the first good payment processing solution from mobile handsets.

imitators promptly sprang into action. A Canadian company called NetSecure launched its own card reader in a half moon shape. Intuit brought a cylindrical reader to the geometric battle. In March 2012, eBay's PayPal unit launched its own copy. cat card reader. It would shape like a triangle, a clear jab at square, as three sides are simpler than four. One gets the sense that this Shakespearean saga won't end until the apes run out of shapes. The hazards of imitative competition may partially explain why individuals with an asperger's like social ineptitude seem to be at an advantage in Silicon Valley today. If you're less sensitive to social cues, you're less likely to do the same things that everyone else around you. you're less likely to do the same things as everyone else around you.

If you're interested in making things or programming computers, you'll be less afraid to pursue those activities single-mindedly and thereby become incredibly good at them. Then, when you apply your skills, you're a little less likely than others to give up on your own convictions. This can save you from getting caught up in crowds competing for obvious prizes. Competition can make people hallucinate opportunities where none exists. The crazy 90s version of this was the fierce battle for the online pet store market.

It was pets.com versus petstore.com versus pettopia.com versus what seemed like dozens of others. Each company was obsessed with defeating its rivals precisely because there was no substantive differences to focus on. Substances to focus on. Amid all the tactical questions, who could price chewy dog toys most aggressively, who could create the best Super Bowl ads, these companies totally lost sight of the wider question of whether the online pet supply market was the right space to be in. Winning is better than losing, but everybody loses when the war isn't worth fighting. When Pets.com folded after the dot com crash, 300 million investment capital disappeared with it. What you start to see once you really start to put together what's being talked about here is that

out of the gate, people want to have an idea of how something is going to work, but not only is how something is going to work, but is it going to be something that is so different that people are going to beg for it. So if you're thinking about the idea of, let's apply this to politics, If you're thinking about the idea of a different governing structure, you're going to want to want to give the people what they want in a way that causes you to have a monopoly. And the one thing that most people don't want to hear about that is you're going to have to give everybody what they want. You're going to try to make everyone happy if you're going to have a monopoly on order. Just file that away.

Think about it. Because I know that people are so angry right now and they're so divided houses that all they want to do is fight. All they want to do is compete. Other times, rivalry is just weird and distracting. Consider the Shakespearean conflict between Larry Ellison, co-founder and CEO of Oracle and Tom Sibel, a top salesman at Oracle and Ellison's protege before he went on to found Sible systems in 1993. Elyson was livid at what he thought was Sibel's betrayal. Sybil had hated being in the shadow of his former boss.

The two men were basically identical, hard-charging Chicagoans who loved to sell and hated to lose. So their hatred ran deep. Ellison and Sibel spent the second half of the 90s trying to sabotage each other. At one point, Ellison sent truckloads of ice cream sandwiches to Sibyl's headquarters to Sibyl's headquarters try to convince Sibyl's employees to jump ship. The copy on the rappers, The copy on the wrappers?

Summer is near. Oracle is here to brighten your day and your career. Strangely, Oracle intentionally accumulated enemies. Ellison's theory was that it's always good to have an enemy as long it was large enough to appear threatening and thus motivational to employees, but not so large as to actually threaten the company. So Ellison was probably thrilled when in 1996,

a small database company called Informix put up a billboard near Oracle's red, Wood Shores headquarters that read, caution, dinosaur crossing. Another Informix billboard on Northbound Highway 101 read, You've just passed Redwood Shores. So did we. Oracle shot back with a billboard that implied that Informix's software was slower than snails.

Then Informic CEO, Phil White, decided to make things personal. When White learned that Larry Ellison enjoyed Japanese samurai culture, he commissioned the new board, billboard, depicting the Oracle logo, along with a broken samurai sword. The ad wasn't even really aimed at Oracle as an entity, let alone the consuming public.

It was a personal attack on Ellison. And those billboards are expensive. Maybe not so expensive that these tech guys have to worry about it, but they are expensive. But perhaps White spent a little too much time worrying about the competition, while he was busy creating billboards, informics imploded in a massive accounting scandal, and White soon found himself in federal prison for securities fraud.

All because of competition. If you can't beat a rival, it may be better to merge. I started Infinity with my co-founder, Max Levchen, in 1998. When we released a PayPal product in late 1999, Elon Musk's X.com was right on our hearing, Our company's offices were four blocks apart on University Avenue in Palo Alto, and X's product mirrored hours feature for feature. By late 1999, we were in an all-out war.

Many of us at PayPal logged a hundred-hour work weeks. No doubt that was counterproductive, but the focus wasn't on objective productivity. The focus was defeating X.com. One of our engineers actually designed a bomb for this purpose when he presented the schematic at a team meeting, calmer heads prevailed, and the proposal was attributed to extreme sleep deprivation. But in February 2000, Elon and I were more scared about the rapidly inflating tech bubble than we were about each other. A financial crash would ruin us both before we could finish our fight. So in early March, we met on neutral ground, a cafe almost exactly

the cafe almost exactly equidistant to our offices and negotiated a 50-50 merger. Deescalating the rivalry post-merger wasn't easy, but as far as problems go, it was a good one to have. As a unified team, we were able to ride out the dot-com crash and then build a successful business. They realized that they really had nothing to fight over and they were fighting basically because of ideology, that ideology taught them to fight, and it prevented them from coming together and being a stronger force. Something to think about.

Sometimes you do have to fight. Where that's true, you should fight and win. There is no middle ground. Either don't throw any punches or strike hard and end it quickly. This advice can be hard to follow because pride and honor get in the way, hence Hamlet, exposing what is mortal and unsure to all. that fortune, death, and danger dare, even for an eggshell, rightly to be great, is not to stir

without great argument, but greatly to find square, to find quarrel in a straw when honors at stake. For Hamlet, greatness means willingness to fight for reasons as thin as an eggshell. Anyone would fight for things that matter. True heroes take their personal honor so seriously, they will fight for things that don't matter. This twisted logic is part of human nature, but it's disastrous in business. If you can recognize competition as a destructive force instead of a sign of value, you're already more sane than most. The next chapter is about how to use a clear head to build a monopoly business.

So this is on chapter five now. This is called Last Mover Advantage. Let me just check a couple things here. 20 minutes in, you get some water. Sorry then. I'm stumbling over some words today. It's the middle of the afternoon and the last episode was done at night. Maybe I'm better at night. I don't know.

All right. Chapter 5. Last mover advantage. Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future. Compare the value of the New York Times with Twitter. Each employs a few thousand people and each gives millions of people a way to get news. But when Twitter went public in 2013, it was.

valued at 24 billion, more than 12 times the New York Times market capitalization, even though the Times earned 133 million in 2012 while Twitter lost money. What explains the huge premium for Twitter? The answer is cash flow. This sounds bizarre at first since the Times was profitable while Twitter wasn't, but a great business is defined by its ability to generate cash flows in the future. investors expect Twitter will be able to capture monopoly profits over the next decade while newspapers monopoly days are over I think there's many reasons why Elon decided he wanted Twitter and maybe even Elon didn't decide that he wanted Twitter and an old friend of his decided it would be best if he bought Twitter for reasons that could be manipulated in the future But all the stories about Twitter, they immediately started coming down on Musk about how it's not profitable. It's not making any money.

Do you believe that? Do you believe it? How are they able to steal so much from him through the courts? All right. So simply stated, how you have a business today is the sum of all the money it will make in the future. To properly value a business, you also have to discount those future cash flows to their present worth, since a given amount of money today is worth more than the same amount in the future. Comparing discounted cash flows shows the difference between low-growth businesses and high-growth startups at its darkest.

Most of the value of low-growth businesses is in the near term. An old economy business, like a newspaper, might hold its value if it can maintain its current cashes. cash flow for five or six years. However, any firm close substitutes will see its profit that's competed away. Nightclubs or restaurants are examples. Successful ones might collect healthy amounts today, but their cash flows will probably dwindle over the next few years when customers move on to newer and trendier alternatives. Technology companies follow the opposite trajectory. They often lose money for the first few years. It takes time to build valuable things that means delayed revenue. Most of a tech company's value will come at least 10 to 15 years

in the future. Got a graph here showing present value cash flows of a business in decline year one through 13, from 120 million down to less than 10. In March 2001, PayPal had yet to make a profit, but our revenues were growing 100% year over year. When I projected our future cash flows, I found that 75% of the company's value would come from profits generated in 2011 and beyond. Hard to believe for a company that has been in business for only 27 months.

But even that turned out to be an underestimation. Today, PayPal continues to grow at about 15% annually and the discount rate is lower than a decade ago. It now appears that most of the company's value will come from 2020 and beyond. LinkedIn is another good example of a company whose value exists in the far future. As of early 2014, its market capitalization was $24.5 billion,

very high for a company with less than a billion in revenue and only $21.6 million in net income for 2012. You might look at these numbers and conclude that investors have gone insane, but this valuation makes sense when you consider LinkedIn's projected future cash flows. There's another graph, present value cash flows of a tech company, LinkedIn. In 2014, you're looking at about 100 million and 2022 rising up to about 700 million, and then it starts to slowly taper off according to this graph.

The overwhelming importance of future profits is counterintuitive, even in Silicon Valley. For a company to be valuable, it must grow and endure, but many entrepreneurs focus only on short-term growth. Many of you work for a company where you know, especially if it's sales, you know all they care about is what the numbers are going to look like at the end of the quarter,

probably because people get bonuses and that's what's worried about, you know, stock options, things like that where you can't sell it for a certain amount of time would probably be a better, more of a carrot. They have a excuse. Growth is easy to measure, but durability isn't. Those who are measurement mania

obsess about weekly active user statistics, monthly revenue targets, and quarterly earnings reports. However, you can hit the numbers and still over the deeper, harder, measure, that threaten durability of your business. Pst, did you know, those Black Friday deals everyone's talking about? They're right here at Beacon South Quarter. That designer's sofa, you've been more. Wanting, it's in Seoul, Boe Concept and Rocheburoix. The Dream Kitchen, check out at Cube Kitchens. Beacon South Quarter, Dublin, where the smart shoppers go. Two hours free parking, just off the M50, exit 13.

It's a Black Friday secret. Keep it to yourself. You catch them in the corner of your eye. Distinctive, by design. They move you, even before you drive. The new Cooper plug-in hybrid range. For Mentor, Leon, and Teramar. Now with flexible PCP finance and trade-in boosters of up to 2,000 euro,

search Coopera and discover our latest offers. Coopera, design that moves. Finance provided by way of higher purchase agreement from Volkswagen Financial Services Ireland Limited, subject to lending criteria. Terms and conditions apply. Volkswagen Financial Services Ireland Limited, trading as Cooper Financial Services is regulated by the Central Bank of Ireland.

with the same problem is every Hollywood studio. How can you reliably produce a constant stream of popular entertainment for a fickle audience? Nobody knows. Groupon posted fast growth as hundreds of thousands of local businesses tried their product. But persuading these businesses to become repeat customers was harder than they thought. If you focus on near-term growth above all else, you miss the most important question you should be asking. Will this business still be around a decade from now? Numbers alone won't tell you the answer.

Instead, you must think critically about the qualitative characteristics of your business. All right. Let's see. I don't think we're going on. Yep, we're still in. Last mover advantage. All right. Yep, step here.

This section is called Characteristics of Monopoly. What does a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics. Proprietary technology, network effects, economies of scale, and branding. This isn't a list of boxes to check as you build your business. There's no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable. One, proprietary technology.

proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Google search algorithms, for example, return results better than anyone else's. proprietary technologies for extremely short page load times and highly accurate query auto-completion adds to the core search products, robustness, and defensibility. It would be very hard for anyone to do to Google what Google did to all the other search engine companies in the early 2000s. As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.

Every time I see a rule of thumb, I think of Boondock Saints. Anything less than an order of magnitude better will probably be perceived as a marginal, improvement and will be hard to sell, especially in an already crowded market. Read that again. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market, 10 times better than its closest substitute. The clearest way to make a 10 times improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite.

A drug to safely eliminate the need for sleep or a cure for baldness, for example, would certainly support a monopoly business. Those, I remember when I was a libertarian, there was this argument against intellectual property and patent and things like that. Basically, the excuse was always that's how the war. machine. You know, it's just part of crony capitalism. It's how the war machine can keep going, things like that. And really, basically, what it is, is it's an excuse for people who don't want to see substantive change. They just want to band-aid. Oh, if we get rid of, if we get rid of intellectual

property, you know, well, if you get rid of intellectual property, why would anybody try to innovate? It's one of the questions I want, you know, some of you, people who are still libertarians to ask as you're reading this, because I know if you're a Messassian, this is completely against everything you've learned about what a free market would look like. Well, first, accept the fact that there's never going to be a free market. It's all in your head. And then start listening. Or you can radically improve an existing solution. Once you're 10 times better, you escape competition. PayPal, for instance, made buying and selling on eBay at least 10 times better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let buyers pay

as soon as an auction ended. Sellers received their proceeds right away, and unlike with a check, they knew the funds were good. Ready for huge savings? We'll mark your calendars from November 28 to 30. because the Lidl Newbridge Warehouse Sale is back. We're talking thousands of your favourite Lidl items, all reduced to clear. From home essentials to seasonal must-habs, when the doors open, the deals go fast. Come see for yourself. The Liddle Newbridge Warehouse Sale, 28th to 30th of November.

Liddle, more to value. You catch them in the corner of your eye. Distinctive, by design, they move you, even before you drive. The new Cooper plugin hybrid range For Mentor, Leon and Terramar Now with flexible PCP finance and trade-in boosters of up to 2000 euro Search Coopera and discover our latest offers Coopera

Design that moves Finance provided by way of higher purchase agreement from Volkswagen Financial Services Ireland Limited Subject to lending criteria Terms and conditions apply Volkswagen Financial Services Ireland Limited Trading as Cooper Financial Services is regular by the Central Bank of Ireland.

Amazon made its first 10 times improvement in a particularly visible way. They offered at least 10 times as many books as any other bookstore. When it launched in 1995, Amazon could claim to be the Earth's largest bookstore because unlike a retail bookstore that might stock 100,000 books, Amazon didn't need to physically store any inventory. It simply requested the title from its supplier whenever a customer made an order. This quantum improvement was so effective that a very unhappy Barnes & Noble filed a lawsuit three days before Amazon's IPO claiming that Amazon was unfairly calling itself

a bookstore when really it was a book broker. You can also make a 10 times improvement through superior. I mean, that's just basically, you know, someone complaining is, well, what are we going to do with horses if we have a car? Isn't that really what it is? You can also make a 10 times improvement through superior integrated design. Before 2010, tablet computing was so poor that for all practical purposes, the market didn't even exist. Microsoft Windows XP tablet PC edition products first shipped in 2002 and Nokia released its own internet tablet in 2005, but they were a pain to use. Then Apple released the iPad. Design improvements are hard to measure, but it seems clear that Apple improved on anything that had come before by at least an order of magnitude. Tablets went from unusable to useful.

Two, network effects. Network effects make a product more useful as more people use it. For example, if all your friends were on Facebook, it makes sense for you to join Facebook too. Unilaterally, choosing a different social network would only make you an eccentric. Network effects can be powerful but you'll never reap them unless your product is valuable to its first users when the network is necessarily small. For example, in 1960, a quixotic company called Xanadu set out to build a two-way communication network between all computers, a sort of early synchronous version of the World Wide Web. After more than three decades of futile effort, Zanadu folded just as the web was in commonplace. Their technology probably would have worked at scale, but it could have worked only at scale.

It required every computer to join the network at the same time, and that was never going to happen. Paradoxically, then, network effects business must start with especially small markets. Facebook started with just Harvard students. Mark Zuckerberg's first product was designed to get all his classmates signed up, not to attract all people on Earth. This is why successful network businesses rarely get started by MBA types. The initial markets are so small that they often don't even appear to be business opportunities at all. I wanted to go back to the thing about intellectual property. Another reason why a lot of people who are against intellectual property are, is because they're anarchists,

and they believe that the government is evil. And obviously, if you're going to have an intellectual property, you're going to have to have a broker, and that broker is going to be the government. And as has already been stated in this book, they're not interested in Peter Dill is not talking about being interested in cronyism. He's talking about technology and advancement and what takes us into the future technologically. Economies of scale. A monopoly business gets stronger as it gets bigger. The fixed costs of creating a product, engineering, management, office space can be spread out over.

ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because of the marginal costs of producing another copy of the product is close to zero. Many businesses gain only limited advantages as they grow to large scale. Service businesses especially are difficult to make monopolies. If you own a yoga studio, for example, you'll only be able to serve a certain number of customers. You can hire more instructors and expand to more locations, but your margins will remain fairly low, and you'll never reach a point where a core group of talented people can provide something of value to millions of separate clients as software engineers are able to do. That's logical. A good startup should have the potential for

scale built into its first design. Twitter already has more than 250 million users today. I don't even know what it is today. It's probably up close to a billion, because this is 2014-ish. It doesn't need to add too many customized features in order to acquire more, and there's no inherent reason why it should ever stop growing. 4. Branding. Take a sit. A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful

way to claim a monopoly. Today's strongest tech brand is Apple. The attractive looks and carefully chosen materials of products like the iPhone and MacBook, the Apple store's sleek minimalist design and close control over the consumer. experience, the omnipresent advertising campaigns, the price-pisseting as a marker of a maker of premium goods, and the lingering nimbus of Steve Jobs' personal charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own. For those of us who use Apple, we still instinctively think of it that way, so I.

Although I don't have an iPhone. Many have tried to learn from Apple's success. Paid advertising, branded stores, luxurious materials, playful keynote speeches, high prices, and even minimalist design are all susceptible to imitation. But these techniques for polishing the surface don't work without a strong underlying substance. Apple has a complex suite of proprietary technologies both in hardware, like superior touchscreen materials, and software, like touchscreen interfaces purpose designed for specific materials. It manufactures products at a large scale, at a scale large enough to dominate pricing for the materials it buys.

And it enjoys strong network effects from its content ecosystem. Thousands of developers write software for Apple devices because that's where hundreds of millions of users are. And those users stay on the platform because it's where the apps are. These other monopolistic advantages are less obvious than Apple's sparkling brand. But they are the fundamentals that let the branding effectively reinforce Apple's monopoly. Beginning with brand rather than substance is dangerous. Ever since Marissa Mayer became CEO of Yahoo in mid-2012, she has worked to revive the once popular internet giant by making it cool again.

In a single tweet, Yahoo summarized Mayer's plan as a chain reaction of people, then products, then traffic, then revenue. The people are supposed to come for the coolness. Yahoo demonstrated design awareness by overhauling its logo. It asserted youthful relevance by acquiring hot startups like Tumblr, and it has gained media attention for mayor's own star power. But the big question is what products Yahoo will actually create? When Steve Jobs returned to Apple, he didn't just make Apple a cool place to work.

He slashed product lines to focus on the handful of opportunities for 10 times improvements. No technology company can be built on branding alone. He looked at everything that they were doing. And if he didn't see anything that could be a monopoly, he cut it. They didn't hold on to it. Think about the way people hold on to this government. Like they're, you know, like if we don't have it, it's the only thing. It's outdated.

It's obsolete. It's an anachronism. The way it is run needs to be overhauled. Hopefully this is giving people some ideas. And I know it's giving people ideas in the past. The people who've read it who actually can attain elite status and make the kind of change that needs to be done. New section.

Building a monopoly. Brand, scale, network effects, and technology in some combination to find the monopoly. But to get them to work, you need to choose your market carefully and expand, expand, deliberately. Start small and monopolize. Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.

Always err on the side of starting too small. The reason is simple. It's easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is. Small doesn't mean non-existent. We made this mistake early on at PayPal. Our first product let people beam money to each other via Palm Pilot. It was interesting technology and no one else was doing it. However, the world's millions of Palm Pilot users were concentrated in a particular place. They had little in common and they used their devices only episodically.

Nobody needed our product, so we had no customers. With that lesson learned, we set our sites on eBay auctions. where we found our first success. In late 1999, eBay had a few thousand high-volume power sellers, and after only three months of dedicated effort, we were serving 25% of them. Pst, did you know? Those Black Friday deals everyone's talking about?

They're right here at Beacon South Quarter. That designer's sofa you've been wanting? It's in Seoul, Boe Concept, and Rocheburoix. The Dream Kitchen, check out at Cube Kitchens. Beacon South Quarter, Dublin, where the smart shoppers go, two hours free parking, just off the end. M50, exit 13. It's a Black Friday secret. Keep it to yourself. It was much easier to reach a few thousand people who really needed our product than to try to compete for the attention of millions

of scattered individuals. This is really good stuff. I hope you're paying attention. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice and a big market already served by competing companies is even worse. That is why it's always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it's hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you'll have to be satisfied with keeping the lights on. Cutthroat competition means your profits will be zero.

Take it a sip. Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon shows how it can be done. Jeff Bezos's founding vision was to dominate all of online retail, but he very deliberately started with books. There were millions of books to catalog, but they all had roughly the same shape. They were easy to ship, and some of the most rarely sold books, those least profitable for any retail store to keep in stock, also drew the most enthusiastic customers. Amazon became the dominant solution for anyone located far from a bookstore or seeking something unusual. Amazon then had two ones, expand the number of people who read books or expand to adjacent markets.

They chose the latter, starting with the most similar markets, CDs, video, and software. Amazon continued to add categories gradually until it became the world's general store. The name itself brilliantly encapsulated the company's scale. strategy. The biodiversity of the Amazon rainforest reflected Amazon's first goal of cataloging every book in the world, and now it stands for every kind of thing in the world, period. eBay also dominating small niche markets. When it launched its auction marketplace in 1995, it didn't need the whole world to adopt it at once. The product worked well for intense interest groups, like Beanie Baby Obsessives, like Beanie Baby Obsessives. Once it monopolized a Beanie Baby

trade. eBay didn't jump straight to listing sports cars or industrial supplies. It continued to cater to small-time hobbyists until it became the most reliable marketplace for people trading online, no matter what the item. Well, sometimes there are hidden obstacles to scaling, a lesson that eBay has learned in recent years. Like all marketplaces, the auction marketplace lends itself to natural monopoly because buyers go where the sellers are and vice versa. But eBay found that the auction model works best for individually distinctive products like coins and stamps. It works less well for commodity products. People don't want to bid on pencils or Kleenex. So it's more convenient just to buy them from Amazon. eBay is still a valuable monopoly. It's just smaller than people in 2004 expected it to be.

It's probably why the interface hasn't changed at all, basically in years and years. sequencing markets correctly is underrated well and by the way so neither has amazon's not much sequencing markets correctly is underrated and it takes discipline to expand gradually the most successful companies make the core progression to make to first dominate a specific niche and then scale to adjacent markets a part of their founding narrative don't disrupt Silicon Valley has become obsessed with Originally, disruption was a term of art to describe how a firm can use new technology to introduce a low-end product at low prices, improve the product over time, and eventually overtake even the premium products offered by incumbent companies using older technology.

This is roughly what happened when the advent of PCs disrupted the market for mainframe computers. At first, PCs seemed irrelevant. Then they became dominant. Today's mobile devices may be doing the same thing to PC. However, disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new. This seemingly trivial fad matters because it distorts an entrepreneur's self-understanding in an inherently competitive way. The concept was going to describe threats to incumbent companies, so startup's obsession with disruption means they see themselves through older firms' eyes.

disruption. What are they trying to do? They're trying to basically move in on something that already exists. That's not monopoly. If you think of yourself as an insurgent battling dark forces, it's easy to become fixated on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create. Indeed, if your company can be summed up by its opposition to already existing firms, it can't be completely new and it's probably not going to become a monopoly. So we're 46 minutes. All right. Let's keep going here. See how far we get. Take a sip. Disruption also attracts attention. Disruptors are people who look for trouble and find it. Disruptive kids get sent to the principal's office.

Disruptive companies often pick fights they can't win. Think of Napster. The name itself meant trouble. What kind of things can one nap? Music, kids, and perhaps not much else. Sean Fanning and Sean Parker, Napster's then teenage founders, credibly threatened to disrupt the powerful music recording industry in 1999. The next year, they made the cover of Time magazine.

A year and a half later, they ended up in bankruptcy court. PayPal could be, and what's funny is eventually iTunes became the place to, it's almost like it was the inspiration for how music was going to be sold digitally, except, you know, you were going to have to pay for it, 99 cents a song or whatever. PayPal could be seen as disruptive, but we didn't try to directly challenge any large competitor. It's true that we took some business away from Visa when we popularized internet payments. You might use PayPal to buy something online instead of using your visa card to buy it in a store. But since we expanded the market for payments overall, we gave Visa far more business than we took. The overall dynamic was net positive. Unlike Napster's negative sum struggle with the U.S. recording industry,

as you craft a plan to expand to adjacent markets, don't disrupt. Avoid competition as much as possible. The last will be first. You've probably heard about first mover advantage. If you're the first entry into a market, you can capture a significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flow in the future.

So being the first mover doesn't do you any good if someone else comes along and unseats you. It's much better to be the last mover, that is, to make the last great development in a specific market and enjoy years of even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there towards your ambitious, long-term vision. In this one particular, at least, businesses like chess, Grandmaster Jose Raoul Capablanca put it well. To succeed, you must study the end game before everything else. And that's the end of chapter five. Chapter six is, you are not a lottery ticket.

and I'm going to break right there because this will probably take this way over an hour if I keep going. So I hope you're enjoying this. I hope my comments are making some sense. I hope I'm able to use this in a way where I can relate it to other things, especially since this is technically a history and politics podcast. Hopefully you're getting something out of this that you can look at. Take, look at ideas of how things may be a startup and how the government could be run just like that. Could be run like a business.

And what's bad for business would be bad for the government. Very simple, very simple ideas. But as we go a little further in this, you'll start to get a little more. It'll become a little clearer. And maybe I'll even get a guest on here to talk about it or something. but being able to do this and record it any time where I don't have to schedule with someone else is just a lot easier. So I hope you're enjoying this. This is going to be released as another off day.

Still doing my Monday, Wednesday, and Friday podcast kind of things. But this is coming out as putting this out as a season with episode numbers and chapters kind of thing, just to be different just so you can differentiate it in your feed. Um, well, like I said, last time in ending it, um, there are going to be ads in this. I'm going to do my best. I have an interview with the people doing that so that I can, uh, set it up so that they're in more natural places where there would be a break so it doesn't break in. But I won't be able to do that till next week.

Uh, if you want to avoid the ads, go to freeman beyond the wall.com forward slash support. And you can sign up through my website, sign up through, uh, through Patreon, sign up through Subscribesar, and I will, through there, you get the episodes for ad-free. There won't be any in there. So, yep, that's it. Chapters four and five are done. The next chapter is called You Are Not a Lottery Ticket.

Follow the Money is Chapter 8, Chapter 7. Secrets is Chapter 8. We'll see what we can get done next time. So until next time. Thank you for tuning in and see in episode three.