Entrepreneur and venture capitalist Peter Thiel isn’t afraid of ruffling feathers, and in the media buildup for his book Zero to One: Notes on Startups, or how to Build the Future, he said that he’s in favor of monopolies because they are one of the best ways for companies (and investors) to turn a profit.
“The single theme in my book that’s the most counter-conventional is that capitalism and competition are opposites. You want to accumulate capital, you don’t want to compete away all the profits,” says Thiel in an interview on Yahoo Finance. “The restaurant industry is extremely competitive, but not capitalistic. No one makes money opening a restaurant.”
Thiel is arguing as someone who wants to own a monopoly
What’s important to understand is that Thiel is looking at this from his own point of view: he thinks monopolies are good for entrepreneurs and venture capitalists, and of course he’s right. If a single company controls an entire market then it can set whatever prices it wants and use its position in one market to create advantages in another.
Google Inc (NASDAQ:GOOG), for example, could be considered a monopoly because of its enormous market share of internet search. Since so many people use Google to find sites online, Google has been able to turn that into a dominant position in internet advertising, which is where it gets most of its money. If Google were one of ten or twenty competing search engines that all had about the same amount of traffic, pressure on advertising rates would make its business model far less profitable. That doesn’t mean Google can charge whatever it wants, at some point advertisers would just drop them for more radio and TV spots, but prices are higher now than they would be with stiffer competition.
The same basic argument applies to any business model: the fewer competitors, the larger margins you can maintain in the long run.
Apple is a “good” monopoly
“When Apple creates the iPhone, which didn’t exist before– it has a monopoly: the only smartphone that works for a number of years, and it deserves to have that monopoly,” Thiel said in an interview with Yahoo Finance. “That’s good for society as a whole. I think the zero to one type companies – that are these breakthrough technologies that change the world are the ones that people should always aim to build.”
Monopolies are good for owners, but not for the rest of us
But monopolies are bad for consumers, and sometimes for society in general. The lack of competition in American broadband, for example, means that US consumers pay more for slower, less reliable service than most other developed countries. Slower broadband could also hold back new businesses that rely on fast, ready internet access from clients. Ideally regulators will step in, as they did with Microsoft Corporation (NASDAQ:MSFT) in the 1990s, but obviously that doesn’t happen all the time.
So the debate really isn’t about whether monopolies are good or bad. Their good for owners and bad for the rest of us. Since Thiel is in the business of funding startups, he likes them. That doesn’t mean the rest of us should follow suit.