09/08/2014 03:48 pm ET Updated Feb 04, 2015

'Monopolies Are Great Companies. Super Competitive Ones Are Not,' Says PayPal Co-Founder Peter Thiel

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Peter Thiel, an entrepreneur and investor, co-founded PayPal and the data analytics firm Palantir Technologies. He made the first outside Facebook investment and funded companies such as SpaceX and LinkedIn. He recently spoke with The WorldPost about his new book, “Zero to One: Notes on Startups or How to Build the Future.”

WorldPost: Your new book, “Zero to One,” is a manifesto for entrepreneurs who want to create something entirely new. The book’s last chapter is titled “Stagnation or Singularity?” What is the connection between these two themes?

Peter Thiel: Any progress in the 21st century must involve the combination of globalization and technology. Globalization copies things that work. Technology is about doing new things -- going from zero to one.

If it is just globalization, at some point we’ll be done copying all the things that work. There is a point at which the so-called “developing” nations will have converged with the so-called “developed” world. At that point progress would basically cease and you’d have stagnation.

We live in a world that believes more in globalization than in technology. You see this in the language we use, which posits a dichotomy between “developed” and “developing” nations. This is not just a pro-globalization dichotomy, but also an anti-technology one.

The developed world in this view is seen as that part of the world that is already where it is headed and nothing new is on the horizon.

Outside of certain areas or “cones” of technology –- information technology, the Internet –- invention has been essentially stagnant for the last 40 or 50 years. Nothing new has happened in transportation or energy in any major way in those decades.

We have to find a way to get back to the future to have technological progress, not just in information technology but many other areas. Then we will have this re-acceleration and takeoff toward a singularity, or big leap to a whole new technological level.

As long as we have technological progress, there is no such thing as the already developed world. From the perspective of 2100, 2014 will look like a backward society.

WorldPost: Why has there been such rapid advance in information technology, but not, as you suggest, in such areas as transportation or energy. We still fly fossil-fueled 747s just like we did decades ago.

Thiel: “Why” questions are always hard to answer. There are several ways to look at it.

In general, there has been much slower progress in the world of “atoms” than in the world of “bits.”

I’m inclined to believe that the world of atoms has been more heavily regulated than the world of bits. If you had the Food and Drug Administration determining whether a violent video game could go on the market because it would do damage to your brain, there would be much less progress in video game technology.

So, we are in a world where atoms have been heavily regulated and bits only lightly regulated. That has made a difference.

Also, there are physical constraints. Atoms are just harder than bits, though there have been exceptional breakthroughs in energy -- for example, Tesla. Innovation in atoms is necessarily more capital intensive. There are complex coordination problems since you are moving things around physically in real space, not virtually.

You can’t really do this, as you can with bits, by gathering a small group of programmers. It really takes a larger group of people from many disciplines to start a Tesla or a SpaceX.

The explanation I don’t like is that we have just run out of ideas, that we are in this great desert of a stagnating imagination, that there are no discoveries left since we’ve picked all the low-hanging fruit. In short, we’ve arrived where we are headed and that is that.

I don’t believe we are in a natural plateau. Low-hanging fruit only look that way in retrospect. I would say the fruits we’ve harvested were of intermediate height. If we are at a plateau, it is for cultural reasons. We are not reaching anymore.

But let’s don’t overdetermine these things. There is not a single cause. There could be others reasons as well, for example, an educational system that encourages incrementalism instead of great leaps. That makes it harder to break though in some areas instead of others.

WorldPost: Despite widespread concern about climate change and pollution, there has been no huge breakthrough in clean, renewable energy. Surely the demand is there. Why haven’t we seen any Googles or Facebooks of clean energy emerge?

Thiel: It is important to understand what the mistakes are here, what went wrong.

For the companies that failed, it wasn’t only one thing, but many. It might have been six or seven factors that went wrong, from management to supply chains.

There is one overarching analogy that fits here, though: The clean-tech bubble of the 2000s was like the dot-com bubble of the 1990s.

Looking at the dot-com bubble in hindsight, people were actually right about the big picture. They were right that the Internet would get much larger and that mobile devices would proliferate; more people would be connected and more commerce would get done.

They were also right that we would face stagnation if we didn’t shift from the old economy to the new economy.

In clean tech, people are also right about the big picture: New technologies will be developed and we will, and need to, see a shift to clean energy in the next decade.

For entrepreneurial companies, the mistakes are in the details. Even if there is a big trend happening, that does not automatically mean you will have a great company if it is focused on the trend. There may be many other people trying to do the same thing at the same time.

If you are the 15th person starting an online pet company, that is not a good idea. If you are the 12th starting a film solar panel company, maybe that is not a good idea.

When people pitched ideas to investors during the dot-com, the first slide in their presentation always showed giant markets for their product. The same was true during the clean tech bubble. It was like the pet food companies going digital. They would say “here is this big market, and if only a certain percentage go on line we’ll have a good business.”

At the core, one of the business challenges is that such a mindset leads to very undifferentiated super competitive businesses, and you always underestimate the competition.

If you are a minnow, a vast ocean is not the place you want to be. You don’t even see the challenges you will face. You have no good handle on the whole system you are up against.

The critical thing in building a valuable company that will still be around a decade from now is to be a “last mover.” People often have the wrong idea that being the “first mover” is key because you can capture market share before competitors arrive. This might work as an opening tactic, but does no good if someone comes along and unseats you with a better or cheaper product.

It is much better to be the “last mover” -– that is, as I say in my book, to make the last great development in a specific market and enjoy decades of monopoly profits.

If you are embedded in an ecosystem in which you have no idea what is going to happen –- what all the new technologies are doing, or if someone comes out of left field with fracking or if China starts offering cheaper manufacturing –- you will be blindsided. None of these things were foreseen from 2005 to 2008 in the clean tech community in the U.S..

The fact that so many clean energy companies have failed is a function of the fact that they were trying to build a company in such a vast space with so many variables.

WorldPost: To avoid being a minnow, you have to become a monopolist in order to grow large. Most people associate innovation with competition. In your contrarian way, you champion monopoly. Can you explain?

Thiel: In a nutshell, the kind of companies you want to create are very unique -– they have a unique sense of purpose, a great technological advantage or some lock on a market which structurally will make it very profitable.

One-of-a-kind companies are monopolies. Every successful zero to one company that achieves a breakthrough is by definition going to be a monopoly. Monopolies are great companies. Super competitive ones are not.

In my view, capitalism and competition, which are said to be synonyms, are really antonyms. In a world of perfect competition, all the capital is competed away. Capitalism is really about the accumulation of capital.

Google is a very capitalist company. They have had no competition since 2002 when they definitively distanced themselves from Microsoft or any other competitor.

On the other hand, if you were to open a restaurant in San Francisco, it would be a very competitive business, but not a very capitalist one.

This idea of monopoly is the most important idea that people just do not talk about enough. They don’t talk about it because companies are worried about government regulation if they are seen as a monopoly; people who don’t have a monopoly pretend they do in order to get investors.

It is very important to cut through the rhetoric.

WorldPost: Monopoly is clearly good for the business, but what about for the consumer and for society?

Thiel: Monopolies deserve their bad reputation in a static world. If you are playing the Parker Brothers board game where all properties are set and the question is who gets the most pieces, that is bad. That is monopoly as a rent collector.

On the other hand, if monopoly is a reward for coming up with something new, then the person creating the monopoly is not creating artificial scarcity. This is true of intellectual property. If you come up with a new drug, you will have a patented monopoly on it because it didn’t exist before.

So, in this sense, the idea of monopoly is an incentive to create new things in a dynamic world.

Take Apple. They were the first to build a smartphone that just worked. That is not creating artificial scarcity by controlling the price of the iPhone, it is creating a new category of things that previously did not exist.

Static world monopoly is a problem. In a dynamic world, it is the way you want healthy businesses to develop.



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