Have you ever wanted to have your name in the news and millions in your bank account? What about billions? What if, for just one thing, the whole world would have to come to you and you alone? If you’ve ever dreamt of building the next Google or Facebook, you are in luck, for today we will explore the art of creating a monopoly.
People hope for a better future, a future of progress that makes their life easier, safer and more rewarding. Everyone strives for progress in one way or another: a baker strives to bake better bread, an airport strives to get more flights and a horse breeder strives to breed faster horses.
At the heart of all of these ambitions lies the same thing: horizontal progress, taking something that exists and making it better. How you make it better does not matter because at the end of the day, there will always be others who will gladly sell inferior goods at a cheaper price.
In the same way that the fastest processor will never be the only processor in the world, the best lawyer will never be the only one.
To build a monopoly, then, you need vertical progress, the act of creating something that wasn’t there before. A monopoly built upon the fastest car will never exist, but a monopoly built upon the first flying car may very well become reality.
Vertical progress, however, is not enough, for if you innovate without capturing some of your innovation’s value, you will be eaten alive by the archnemesis of all monopolies: competition.
That is why horizontal progress is so hard to monopolize: you’re effectively trying to beat the best players at their own game.
Examples of Monopolies
Have a look at the fate of commercial aviation, arguably one of the greatest inventions of the 20th century. In 2013 airlines earned just $4.13 per passenger at a time when the average fare was almost $760. In other words, the airlines earned $13 billion of net income on over $700 billion of revenue. Compare this to a modern monopoly like Google, who earned the same amount on only $55 billion of revenue and you’ll see why competition is such a thorn in everyone’s sides.
If you’re wondering whether Google is a monopoly, the real question is what has Google monopolized?
Google owns 89% of the global search engine market and yet by positioning themselves in the global advertising business or the global IT business they make themselves out to be a small fish in a very large pond.
Make no mistake, all of their side ventures like Google fiber and their self-driving car are just as much a defense mechanism as they are attempts at innovation.
In the modern information age, it is very hard for a monopoly to survive once it gets in the public’s eye. After all, bragging about how successfully monopolistic you are is a quick way to get audited and broken up. Thus, modern monopolies must survive by hiding in plain sight.
Americans enjoy mythologizing competition as the great driving force behind innovation, but historically the greatest innovations have come from the allure of monopoly. Without the promise of great wealth no one in their right mind would risk their fortune on innovation.
Difference Between Becoming a Monopoly and Staying a Monopoly
In the 1960s, for example, IBM essentially owned the IT business through their mainframe computers. Then during the 80s when the market shifted to personal computers and hardware became less profitable, the power went to Microsoft and their operating systems. Then Microsoft lost ground to Google when mobile computing started to take off at the end of the past decade.
History has shown that that if a monopoly does not innovate it will eventually be replaced. How fast that happens depends on a lot of factors, the most important of which is government support, but regardless of the speed, the process of innovation is inevitable, and eventually even the worst monopolies of today will become relics of the past.
Monopolies have a bad reputation in the US because the country has had to deal with a lot of bad ones in the past. Historically, the worst ones were those formed around commodity goods, as was the case with Standard Oil and American Tobacco, which jacked up prices to unreasonable levels.
In a static world, that would be the only type of monopoly, but our world is dynamic and ever-changing, with opportunities to innovate lurking around every corner.
To build a modern monopoly you need to seize these opportunities. Said another way, what you want to build is a creative monopoly, one that does not overtake and strangle an existing market, but rather creates an entirely new one all for itself.
In essence, you need to solve a problem that a lot of people have. The trick here is that these people don’t even know they have a problem. After all, the people of the 19th century lived perfectly fine without cars, as did you 20 years ago without a smartphone.
How to Create a Monopoly
To build a creative monopoly you have to do three things.
- Proprietary Technology
- Economies of Scale
1. Proprietary Technology
Innovation is the mother of all creative monopolies, and the harder it is for others to replicate your product, the more successful you will be. You can try to innovate existing technology, but in general you’ll need to improve something by at least an order of magnitude before you can overcome your big established competitors. It is hard to build a monopoly this way, but it’s not impossible and some of the biggest companies of our time did exactly that.
Amazon offered more than 10 times as many books as any bookstore in existence. Similarly, Apple definitely improved the design of tablets by at least an order of magnitude, since they went from being borderline unusable to extremely popular. Of course, by far the best way to innovate is to create something entirely new, since then you don’t have any competitors to worry about, at least initially.
2. Economies of Scale
A monopoly should only become stronger the larger it gets, otherwise it’ll get destroyed by the copycats it will inevitably attract. It may seem delusional to think about scaling to the billions while you’re still at the drawing board, but if your idea cannot scale it will never become a monopoly.
Economies of scale are why it’s so hard to monopolize a service: after all, even if you’ve got the best doctors in the world, they can only attend to so many patients at once.
Software, on the other hand, lies at the other end of the spectrum and is the quickest road to monopoly, since every new copy of your product is only one click away. Harnessing economies of scale becomes even more important if your product’s value relies on other people using it, also known as the network effect.
Consider the immense pressure people feel to make a Facebook profile. Almost everyone has one and if you do not join you are essentially dooming your social life to oblivion. But if none of your friends were on Facebook, you wouldn’t be compelled to join at all, since what good does it do to join a ghost town?
The problem with monopolies that rely on the network effect is that it’s very very hard to get the ball rolling initially. Your network must provide value to its users regardless of its size in order to attract its initial userbase. Counterintuitively then, the best way to harness the network effect is to start in the smallest market you can find. After all, Mark Zuckerberg created Facebook for his classmates at Harvard, not for all of mankind.
Remember all those people whose unwitting problems you have solved? Those same people are being bombarded with other solutions to other problems all year round. You must convince them that they need your solution above all others, and to do that you need a distribution strategy.
People tend to scoff at distribution because it seems superficial and dishonest. After all, shouldn’t a superior product be able to stand out on its own? In an ideal world, maybe, but in our day and age even just convincing someone to try your product is a daunting task.
Distribution is important because it works. You may think that you are an exception, that your tastes are authentic and that only other, weaker-minded people can fall prey to advertising, but make no mistake, you are not different. People tend to live with a false confidence in the autonomy of their preferences because they’ve become very good at resisting obvious sales pitches. But the best advertising is hidden in plain sight, and the best salesmen are those whose performance is so captivating that you don’t even realize that you’re being sold.
The true masters of distribution have job titles completely unrelated to what they actually do: the people who sell customers are “business developers”, the people who sell companies are “investment bankers” and the people who sell themselves are “politicians”.
Persuading other people to buy what you are selling is quintessential and in the end, regardless of whether you make money through ad clicks or through government contracts, without a distribution strategy your monopoly is doomed to fail.
The allure of monopoly is hard to resist, for although the opportunities are few, the rewards are great and those who succeed become a part of history. If you wish to try your hand at this daunting task, I can highly recommend the book “Zero to One” by Peter Thiel, the co-founder of PayPal. This book is what inspired me to make this article and it is a brilliant work that offers dozens of counterintuitive insights that will help you see the world differently.