Good afternoon. Today's speaker is Peter
Thiel. Peter, was the founder of
PayPal, and Palantir, and Founders Fund,
and has invested in most of the tech companies in
Silicon Valley. And he's going to talk about
strategy and competition. Thank you for coming, Peter.
>> Awesome. Thanks, Sam. Thanks for inviting me. Thanks for having me. I sorta, I have a single a
day fixed that I'm completely
obsessed with in. On the business side which
is that, if you're starting a company, if you're the
founder, entrepreneur starting a
company, you always want to aim for monopoly, and that you want
to always avoid competition. Hence, competition is for
losers. Something we'll be talking
about today. I'd like to start by saying
something about the basic idea of when
you start one of these companies how you
go about, creating value? And this question, what
makes a business valuable? And I wanna, suggest that
there's basically, a very simple very simple
formula that you, have a valuable company
two things are true. Number one, that it creates
X dollars of value for the world. And number two, that you
capture Y% of X. And the critical thing that
I think people always miss in the sort of analysis is
that X and y are completely independent variables, and
so X can be very big. Y can be very small. X can be of intermediate
size. And if Y is, is reasonably
big you can still get a very big business. So, to create a valuable
company you have to basically, both create
something of value and capture some fraction of the value of what you've
created. And sort of, just to illustrate this is a
contrast. If you sorta, compare the US
airline industry with a company like Google on
search. If you sorta, measure by the size of these industries
you could, you could say that airlines are still more
important than search. If you just measure it say
by revenues. There's 195 billion. In domestic revenues in
2012. Google had just north of 50
billion. And certainly, sort of on
some intuitive level, if you said, if you were
given a choice and said well do you want to get
rid of all air travel. Or do you want to get rid of
your ability to use search engines? The intuition would be that
air travel is something that's more
important than search. And this is, of course, just
the domestic numbers. If you had looked at this
globally, airlines are much, much bigger than search, or
Google, is But the profit margins are quite
a bit less. You know, they were marginally
profitable in 2012. Think entire hundred year
history of the airline industry. The cumulative profits in
the U.S. have been approximately
zero. The companies make money. They episodically go
bankrupt. They get re-capitalized and you sort of cycle and
repeat. And this is reflected in you
know the combined market capitalization of the
airline industries maybe something of the U.S.
airline industry. Something like a quarter
that of Google. So, you have a search engine
much, much smaller than air travel
but much more valuable and I think this reflects these
very different valuations on X and Y. So, you know, if we look at
perfect competition. You know there are, sort of,
there's some pros and cons to the world of perfect
competition. On a high level it's always, this is what you study in
Econ One. It's always, it's easy to
model, which I think is why Econ professors like talking
about perfect competition. It somehow is efficient,
especially, in a world where things are
static because you have all the consumer surplus gets
captured by everybody. And politically, it's what
we're told is good in our society, that you want
to have competition and this is somehow a good
thing. Of course, there are a lot
of negatives. It's generally not that good
if you're. You're involvement in
anything that's hyper-competitive because
you often don't make money off, come back to
this a little bit later. So, I think at one end of
the spectrum you have industries that are
perfectly competitive. And at the other end of the
spectrum you have things that, I would say,
are monopolies. And they're much stable,
longer term businesses, you have more capital. And if you get a creative
monopoly for inventing something new, I
think it's symptomatic of having created something
really valuable. And so I do think this, the
extreme binary view of the world I always
articulate is that there are exactly two kinds
of businesses in this world. There are businesses that
are perfectly competitive and there are businesses
that are monopolies. And, there's shockingly
little that is in between. And this dichotomy is not
understood very well because people are
constantly lying about the nature of the
businesses they're in. And this is why, this is in my mind, this is
the most important. It's not necessarily the
most important thing in business, but I think it's
the most important business idea that
people don't understand. That there are just these
two kinds of businesses. And so let me say a little bit about the
lies that people tell. And so you basically, the
basic, if you sort of imagine that there was a
spectrum of companies from perfect competition to
monopoly. The apparent differences are
quite small. Because the people who have
monopolies pretend not to. They will basically say, and
it's because you don't want to get regulated
by the government, you don't want the government to
come after you. So you will never say that
you have a monopoly. So, anyone who has a
monopoly will pretend that they're in incredible
competition. And on the other end of the
spectrum, if you are incredibly competitive,
and if you're in some sort of business will you will
never make any money. You will be tempted to tell
a lie that goes in the other direction. Where you will say that
you're doing something unique that is somehow less
competitive than it looks. Because you will want to
differentiate, you will want to track capital
or something like that. So, if the monopolists
pretend not to have a monopolies the
non-monopolists pretend to have monopolies. The apparent difference is
very small. Where as the real difference
I would submit is actually quite big. And so there's this
distortion that happens because of the lies people
tell about their businesses. And the lies are sort of in
these opposite directions. Let me, drill a little bit
down further on the way these lies work. And so the basic lie you tell as a non-monopoly is that we're
in a very small market. The basic lie you tell as a
monopoly is that the market you're in is
much bigger than it looks. And so typically, if you want to think this in
sort of set theoretic terms. You could say that a
monopoly tells a why, where you describe your
business as the union of these vastly different
markets, and the non-monopolies describes
it as the intersection. So, that in effect, if
you're non-monopolist, you will rhetorically describe
your market as super small. You're the only person in
that market. If you have monopoly, you'll
describe it as super big, and there's lots of
competition in it. So some examples of how this
works in practice. So I always use restaurants
as the example of a terrible business. And there's always, sort of,
ideas that, you know, capitalism and
competition are antonyms. Capital, someone who
accumulates capital. World of perfect competition
is a world where all the
capital gets competed away. So, you're opening a
restaurant business. No one wants to invest
because you just lose money. So you have to tell some
idiosyncratic narrative. And you will say something
like, well, we're the only British food
restaurant in Paolo Alto. So, it's British, Paolo
Alto. And of course, that's too small a market
because people may be able to drive all the way to
Mountain View or even Park. And there probably no people
who eat nothing but British food. At least, no people are
still alive. And so that is sort of a
fictitiously narrow market. There's sort of a Hollywood
version of this where. The way movies always get
pitched is, it's like a college football star,
joins an elite group of hackers to catch the shark
that killed his friends. So, that is a movie that has
not been made. But the question is, is that the right category
or is the correct category? It's just another movie, in
which case, you know, there are lots of those,
it's super competitive, incredibly had to make
money. No one ever makes money in
Hollywood doing movies. It's really hard. And so you always have this
question about. Does the intersection, does, is it real, does it make
sense, does it have value that one
should ask? And of course, there are
start up versions of this. Where you, and the sort of
the really bad versions you just take a whole series of
buzz words. Sharing, mobile, social,
apps, you combine them, and you have some kind of
narrative. And, whether or not, that's
a real business or not, is, it's generally a bad
sign. So it's, it's almost this
pattern recognition when you have this rhetoric of this sort of intersections, it
generally does not work. The something of somewhere is really mostly
just the nothing of nowhere. It's like the Stanford of
North Dakota. One of a kind, but it's not
Stanford. So, let's look at the
opposite. The opposite lie, is if you
are, let's say, the search, company, that's
down the street from here. And has about a happy 66%
market share and, you know? Is completely dominant in
the search market. Google has not almost never
describes itself. As a search engine, these
days. And instead, it describes
itself in all these different ways. So, it sometimes says it's
an advertising company. So, if it was search, you'd
say, well, it's, like, it has this huge market share
that's really, really crazy. It's like a incredible
monopoly. It's much bigger than, it's
much, much more robust monopoly
than Microsoft, ever had in the 90s. Maybe that's why it's making
so much money. But if you say it's an
advertising market, you could say, well, there's search
advertising is 17 billion. And that's part of online
advertising, which is much bigger. And then, all US advertising
is bigger. And then by the time you get
to global advertising, that's close to 500 billion. And so you're talking about
3.5%. So a tiny part of this much
larger market. Or if you don't want it to
be an advertising company you could always say that
you're a technology company. And so sorry. Let me just see. And so the technology market is
something like a $1 trillion market, and the narrative
that you tell is that Google in the technology market is
well we're competing with all the car companies with
our self-driving cars, we're competing with Apple
on TVs and iPhones. We're competing with
Facebook. We're competing with
Microsoft on office products, we're competing
with Amazon on cloud services, and so, we are in
this giant technology market where there's competition in
every direction you look. And no we're not the monopoly the
government's looking for and we should not get regulated
in any way whatsoever. And so I think one has to
always be super aware that there are these very
powerful incentives to distort the nature of
these markets one way or the other. So, the evidence of the
narrow markets in the tech industry is if you
basically just. If you look at sort of the,
some of the big tech companies, Apple,
Google, Microsoft, Amazon, they just they've
just been building up cash for year after year and
you have these incredibly high profit margins and I
would, I would say that the. That one of the reasons the
tech industry in the US. Has been so successful
financially. Is because it's prone to
creating all these monopoly like business. And that's and it's reflected by these
companies. Just accumulate so much
cash. That they don't know what to
do with it beyond a certain point. And so let me say a few things about how
to build a monopoly. And, I think one of the sort
of very counter intuitive ideas that comes
out of this monopoly thread. Is that you want to go after
small markets. If you're a startup. You want to get to monopoly. You're starting a new
company, you want to get to monopoly. Monopolies you have a large
share of a market, how do you get to a large
share of a market? You start with a really
small market and you take over that whole
market, and then. And then over time you find
ways to expand that market in concentric circles. And the thing that's always
a big mistake is going after a giant market on day
one. Because that's typically
evidence that you somehow haven't defined the
categories correctly. And it normally means that
there is going to be too much competition. In one way or another. And so I think almost all
the successful companies in Silicon Valley had some
model of starting with small markets
and expanding. And if you take Amazon, you
start with. Just a bookstore. We have all the books in the
world. So it's a better bookstore
than anybody else has in the world. When it's starts in the
90's, it's online, there's things you can do
you can't do before. And then you gradually
expand into all sorts of different forms of
e-commerce and other things beyond that. You know, eBay you start
with Pez dispensers. You move on to Beanie Babies
and eventually it's all these
different auctions for all these sorts of different
goods. And what was very counter
intuitive about many of these companies is they
often start with markets that are so small
that people don't think that they're valuable at all
when you get started. The PayPal version of this
was, we started with power sellers on eBay which
was about 20,000 people. When we first saw this
happening in December of 99, January of 2000 right after
we launched, there was a sense that these
were all, it was such a small market
it was terrible. We thought these were
terrible customers to have. It's just people selling
junk on the internet. Why in the world do we want
to be going after this market? But, you know, there was a
way to get a product that was much better for
everybody in that market. You could, and we got to
something like 25, 30%, you know, market penetration
in two or three months. And you got some walk in. You got brand recognition
and your able to build the
business from there. So I always think these, these very small markets are
quite underrated. The Facebook version of this
I always give is that you know if the initial market
of Facebook was 10,000 people
at Harvard, it went from zero to sixty percent market
share in ten days. That was a very auspicious
start. The way this gets analyzed
in business schools is always, that's ridiculous, it's such a small market it
can't have any value at all. And so, I think the business
school analysis of Facebook early on, or of
PayPal early on, or of eBay early on is that the
markets were perhaps, so small as to have, almost no
value. And they, they would have
had little value had they stayed small, but it
turned out they were ways to grow them concentrically
and, that's what made them, that's what made them so
valuable. Now I think the opposite
version of this, is always where you have
super big markets. And, and I, there's so much, so many different things
that went wrong with all the clean tech companies in
the last decade. But, but, one, one theme that ran through
almost all of them, was that they all started
with massive markets. And every clean tech
PowerPoint presentation that one saw in the years 2005 to
2008, which was the clean tech
bubble in Silicon Valley. Started with, we're in the
energy market, we're in a market that's
measured in hundreds of billions of trillions of
dollars. And then once you're a
minnow in a vast ocean. That's not a good place to
be. That means that you have
tons of competitors and you don't even know who all
the competitors are. And so you want to be a one
of a kind company, where it's the only one in a
small ecosystem. You don't want to be the fourth online pet
food company. You don't want to be the tenth thin film solar
panel company. You don't want to be the
100th restaurant in Palo Alto. Your restaurant industry is
a trillion dollar industry, so if you do a market size
analysis you conclude restaurants are a fantastic
business to go into, and it's often, large markets,
large existing markets typically mean that you have
tons of competition, very, very hard to differentiate. So the first very
counterintuitive into a idea is to go after small
markets, often markets that are so small people don't
even notice them. They don't think that they
make sense. That's where you got a
foothold, and then if those markets are
able to expand, you can scale into a big
monopoly business. You know, a second sort of,
the sort of several different characteristics of
these monopoly businesses, that I like to focus on. There's probably no sort of
single formula to it. I also ways think that that
in technology there is always a sense that you
know, the history of technology is
such that every. Every moment happens only
once, so you know the next Mark Zuckerberg won't build
a social network. The next Larry Page won't be
building a search engine. The next Bill Gates won't be building an operating
system. And if you're copying these
people, you're not learning from
them. But it's, and so, there is always these very
unique businesses that are doing something that's
not been done before, end up, end of having the
potential to be a monopoly. The opening line in Anna
Karenina that all happy companies, sorry, all
happy families. All happy families are
alike. All unhappy families are
unhappy in their own special way. And the opposite is true in
business, where I think all happy
companies are different because they're doing
something very unique. All unhappy companies are
alike because they fail to escape the essential
sameness that is competition, and so one sort of characteristic
of a monopoly technology company is some sort of
proprietary technology. My sort of crazy, somewhat
arbitrary, rule of thumb is you want to
have a technology that's an order of magnitude better
than the next best thing. So Amazon had over ten times
as many books, maybe not that high tech,
but you figure out a way to sell ten times as many books
in an efficient online way. You know, PayPal, the
alternative for PayPal was using checks to
send money on eBay, took seven to ten days to
clear. PayPal could do it more than
ten times as fast. So you wanna have some sort
of very powerful improvement in some
order, maybe an order of magnitude improvement on
some key dimension. Of course, you know, if you actually come with
something totally new it's, it's just, it's just like an
infinite improvement. So I would say the, the iPhone was the first
smartphone that worked and so that's, you know that's
like I mean, I mean maybe not infinite,
but it's sort of definitely
order of magnitude or more of improvement. So I think, the, the
technology is designed to give you a massive delta
over, over the next, the next best thing. I think, I think there often
are network effects that can kick in that, really
help. The thing that's very, and
these, these lead to monopolies
over time, the thing that's very tricky
about network effects is, they're often. They're often very hard to
get started. So even though everyone
understands how valuable they are, there is always this incredibly
tricky question why is it valuable to the first person
who is doing something? Economies of scale, if you
have something of a very high fixed costs,
very low marginal cost. That's typically a monopoly
like business. And then there's this thing
of branding. Which is sort of like this
idea that gets lodged in people's brains. I never quite understand how
branding works, so I never invest in companies where
it's just about branding. But it is, I think, a real phenomenon that
creates real value. I think one of the things,
I'm gonna come back to this a little bit, towards
the end. But one of the things that's
very striking, is that software businesses
are often, are, for some reason, very good at
some of these things. They're especially good at
the economies of scale part. Because, the marginal cost
of software is zero. And so if you get something
that works in software. It's often significantly
better than the existing solution. And then you have these
tremendous economies of scale, and you can scale
fairly quickly. So even if the market starts
small, you can grow your business
quickly enough to stay at the same size as the growing
market. And maintain the sort of
monopoly power. Now, the critical thing
about these monopolies is, it's not enough to have a
monopoly for just a moment. The critical thing is to have one that lasts over
time. And so in Silicon Valley
there's always this idea that you wanna be the first
mover. And I, I always think it's,
it's, in some ways, the better framing is you
wanna be the last mover, or you wanna be the last
company in a category. Those are the ones that are
really valid. Microsoft was the last
operating system, at least for many decades. Google is the last search
engine. Facebook will be valuable if
it turns out to be the last, social networking site. One way to think of this last mover of value is
this idea that most of the value in these companies
exists far in the future. If you do a discounted cash
flow analysis of a business. You look at, you have sort
of all these profit streams. You have a growth rate. The growth rate's much
higher than the discount rate. And so most of the value
exists far in the future. I did this exercise At
PayPal in March of 2001. We'd been in business for
about 27 months. And we sort of had, the
growth rate was 100% a year. We were discounting future
cashflows by about 30%. And it turned out that about
three quarters of the value of the business,
as of 2001, came from cash flows in
years 2011 and beyond. And whenever you do the math
on any of these tech companies, you get an answer
that's something like that. So if you are trying to
analyze any other tech companies in Silicon
Valley, Arabian B, Twitter. Facebook, any emerging
internet companies, any of the ones in
Y-Combinator. The math tells you that
three quarters, 80, 85% of the value is coming
from cash flows in years 2024 and beyond. It's very, very far in the
future. And, so one of the things
that we always overvalue in Silicon Valley is growth
rates, and we undervalue durability. Because, growth is something
you can measure in the here and now, and you can always
track that very precisely. The question of whether a
company's still gonna be around a decade from now. That's actually what, what dominates the value
equation and that sort of is a much more
qualitative sort of a thing. And so if we, if we went
back to this idea of these characteristics of monopoly,
proprietary technology, network effects, economies
of scale, You can think of these characteristics as
ones that exist at a moment in time when you capture a
market and take it over. But you also want to think
about, are these things going to
last over time. And, so, there's a time dimension to all these
characteristics. So, net worth effects also
have a great time element, where as the network scales
the network effects actually get more
robust, and so if you have a network effect
business that's often one that can become a bigger and
stronger monopoly over time. Proprietary technology is
always a little bit of a tricky one, so you want something that's
order magnitude better. Than, the state of the art
in the world today. And that's how you get
people's attention. That's how you initially
break through. But then, you don't wanna be
superseded by somebody else. And so there are all these
areas of innovation where, there was tremendous
innovation, but no one made any money. So, you know? Describe manufacturing in
the 1980's. You could im-, you could do a better disk, build a better disk drive
than anybody else. You could take over the
whole world. And two years later someone
else would come along and replace yours. And the course of 15 years, you got vastly improved disk
drives, so it had great benefit to
consumers, but it didn't actually help the people who
started these companies. And so there's always this
question about having a huge breakthrough in technology,
but then also being able to say, explain why, yours will
be the last breakthrough, or at least the last
breakthrough for a long time, or when you
make a breakthrough. And then you can keep
improving on it at a quick enough pace that
no one can ever catch up. So, if you have a structure
of structure of the future where there's a
lot of innovation and other people will come up
with new things in the thing you're working on. That's great for society. It's actually not that good
for your business, typically. And then economies of scale,
we've already talked about. So I think this last mover
thing is very critical. I'm always, you know, I don't wanna overdo the
chess analogies, but the first mover in chess is
someone who plays white. White is about a 1/3 of a
pawn advantage, so there's a small advantage to
going first. You wanna be the last mover,
who wins the game, so there's always the,
Capablanca world champion, Capablanca must begin by
studying the end game, and I do think that's, while I
wouldn't say that's the only thing you should study. I think the sort of
perspective of asking these questions, why
will this still be the leading company 10, 15,
20 years from now, is a, is a really critical one to
try to think through. Let me, let me sort of, I want to sort of go in two
slightly other directions with this monopoly vs
competition idea. And I think so I think this
is the, the central idea, in my mind for, for business
for starting business for thinking about them and
there are some, interesting perspectives I think it
gives on the whole you know, on the whole history of
innovation and technology and science. Because, yeah we've, we've
lived through, 250, 300 years of incredible
technological progress in you know many, many
different domains. You know, steam engine to
railways to telephones, refrigeration,
household appliances, you know the computer
revolution, aviation. All sorts of different areas
of technological innovation and
then there's sort of analogous thing that one can
say about science, where we've lived through
centuries of enormous amounts of innovation in
science as well. And the thing that I think
people always miss when they think about these
things is that because X and Y are independent variables,
some of these things can be extremely valuable
innovations. But the people who invent
them, who come up with them, do
not get rewarded for this. And certainly, you can go
back to, you need to create X dollars in value,
you create Y percent of X. I would suggest that the
history of science has generally been one where Y
is 0% across the board. The scientists never make
any money. They're always deluded into
thinking that they live in a just universe that will
reward them for their work and for their
inventions. And this is probably the
fundamental delusion that scientists tend to suffer
from in our society. And even in technology,
there are, sort of, many different areas of
technology, where there were great
innovations that created tremendous value for
society. But the people did not
actually capture that much of the value. And so I think there is a
sort of whole history of. Science and technology that can be told
from the perspective of how much value was actually
captured. And certainly, there are
entire sectors where people didn't capture
anything. So you're the smartest
Physicist of the 20th century, you come up with
special relativity, you come up with general
relativity. You don't get to be a
billionaire, you don't even get to be a
millionaire. It somehow doesn't work that
way. The railroads, incredibly
valuable. Most of them just went
bankrupt, because there was too much
competition. Wright brothers, you fly the
first plane, you don't make any money. And so I think there is sort
of a structure to these industries, that's
very important. And I think the thing that's
actually rare, are the success cases. Most the, so it's actually
unique when you really think about the history in this,
in this 250 year sweep, it's unusual, Y is almost
always zero percent. It's always zero in science. It's almost always in
technology, and so it's very rare where
people made money. You know, the early, the late 18th, early 19th
century, the first industrial revolution was
textile mills, steam engine, the sort of automated
things. And you had these relentless
improvements, that people improved
efficiency of textile factories,
manufacturing generally. At a clip of 5 to 7% every
year. Year after year, decade
after decade. You had 60, 70 years of tremendous improvement from
1780 to 1850. But even in 1850, most of
the wealth in Britain was still held by the landed
aristocracy. The workers didn't, you
know, the workers didn't make that
much, the capitalists didn't make
that much either. It was all competed away. There were hundreds of people running textiles
factories. It was an industry that
just, the structure of the
competition prevented people from making any money. And so I think there are, in
my mind, there probably are only two
broad categories in the entire history, the last
250 years, where people have actually
come up with new things, and made money doing so. One is these sort of
vertically integrated complex monopolies which
people did build in the second industrial
revolution at the end of the 19th and started the
20th century. And so this was like Ford,
it was the vertically integrated oil companies
like Standard Oil. And what these vertically
integrated monopolies typically required was this
very complex coordination. You've got a lot of pieces
to fit together in just the right way, when you
assembled it, you had a tremendous
advantage. This is actually done
surprisingly little today. And so I think this is sort
of a business form that when people can pull it off
is very valuable. It's typically fairly
capital intensive. We live sort of in a, in a
culture where is very hard to get people to buy into
anything that's super complicated, and it takes
very long to build. But I, you know, when I sort of think about
my colleague Elon Musk from PayPal success with
Tesla and Space X, I think the key to these companies
was the complex vertically integrated monopoly
structure they had. So if you sort of look at
Tesla or Space X you ask, you know, was there sort of
single breakthrough? They certainly innovated on
a lot of dimensions. I don't think there was a single tennex breakthrough
and battery storage, or you know, maybe working
on some things in rocketry. But they hadn't, there was no sort of single
massive breakthrough, but what was really impressive
was integrating all these pieces together, and doing
it in a way that was more vertically integrated than
most of their competitors. So, Tesla, you also integrated the car
distributors, so they wouldn't steal all the
money, as has happened with the rest of the car industry
in the US. Or SpaceX, you basically
pulled in all the subcontractors where
most of the large aerospace companies have single source
subcontractors that are able to sort of charge monopoly
profits, and make it very hard for the integrated aerospace
companies to make money. And so vertical integration
I think is sort of a very under explored modality of
technological progress, that people would do well to
look at more. And then I think there is,
there is something about software itself that's very,
very powerful. Software has these
incredible economies of scale, these low marginal
costs and there is something about the world of bits, as
opposed to the world of adams, where you can often
get very fast adoption. And, and the fast adoption
is critical to capturing and taking over markets because
even if you have a small market if the
adoption rate is too slow, there'll be enough time for
other people to enter that market, and
compete with you. Whereas if you have a small
to mid size market, and have a fast adoption rate. You cannot take over this
market. And so I think this is one of the reasons Silicon
Valley has done so well, and why software has been this
phenomenal industry. And what I, what I would
suggest, what I would want to leave you with is there
are sort of these different rationalizations people give
for why certain things work, and why certain things don't
work. And I think these
rationalizations always obscure this question of
creating X dollars in value, and capturing Y percent of
X. So the science
rationalization we're always told, is that the scientists aren't
interested in making money. They're doing it for charitable reasons, and that
you're not a good scientist if you're
motivated by money. And I'm not even saying
people should always be motivated by money
or something like this. But I think we should be a
little more critical of this as a rationalization. We should ask, is this a
rationalization to obscure the fact that Y
equals zero percent. And the scientists are
operating in this sort of world where all the
innovation is effectively competed away,
and they can't capture any of it
directly. The software distortion that
often happens, is because people are making
such a vast fortunes in software, we infer that this
is the most valuable thing in the world
being done full stop. And so if people at Twitter
make billions of dollars, it must be that Twitter is
worth far more than anything that Einstein did. What that sort of
rationalization tends to obscure, is again that X and
Y are independent variables. And there are these
businesses where you capture a lot of X and there
others where you don't. And so, I do think the
history of innovation has been this history where the
microeconomics, the structure of these
industries has mattered a tremendous amount. And when there is sort of
this story where some people have
made vast fortunes, because they were in industries with
the right structure, and other people made nothing at
all, because they were in these sort of very
competitive things. And we shouldn't just
rationalize that away, I think it's worth
understanding this better. And then finally, let me
come back to this sort of overarching theme
for this talk, this competition
is for losers idea. Which is always a
provocative way to title things, because we
always think of the losers as the people who
are not good at competing. We think of the losers as
the people who are slow on the sports team, on the
track team in high school, or who do a little bit less
well on the standardized tests, and don't get into
the right schools. So we always think of losers
as people who can't compete, and I want us to really
rethink, and revalue this and
consider whether it's possible that competition
itself is off. That we've sort of, it's not
just the case and we don't understand this monopoly competition
dichotomy intellectually. So that's, sort of, why you wouldn't understand
intellectually, because people lie about it. It's distorted. We have all these history of
innovation rationalizes what's
happening in all these very, very strange ways. But I think it's more than
just an intellectual blind spot, I think it's also a
psychological blind spot where we find ourselves, you
know, very attracted to competition in one form or
another. We find it reassuring if
other people do things. The word ape, already in the
time of Shakespeare, meant both primate and
imitate. And there is something about human nature
that's deeply mimetic. Imitative. Apelike, sheeplike,
lemminglike, herdlike. And it's this very
problematic thing that we need to always think through
and try to overcome. And there is always this
question about competition as a form of
validation. Where we go for things that lots of other
people are going for, and it's not that there is
wisdom in crowds, it's not when lots of people are
trying to do something that, that's proof of it being
valuable. I think it's when lots of
people are trying to do something that is often
proof of insanity. There are twenty thousand
people a year who move to Los Angeles to become movie
stars, about 20 of them make it. I think the Olympics are a
little bit better, because you can figure out
pretty quickly whether you're good or not, so
there's a little bit less of a dead weight loss to
society. You know? >> You the sort of
educational experience at a place, the pre Stanford
educational experience. There's always sort of a non-competitive
characterization, where I think most of the people in
this room had machine guns, that were competing with
people with bows and arrows. So it wasn't exactly a
parallel competition when you were in junior high
school and high school. There's always a question, does the tournament make
sense as you keep going? And there is always this
question if people go on to grad school, or post doctoral educations,
does the intensity of the competition really make
sense? There's the classic Henry
Kissinger line describing his fellow
faculty at Harvard. That the battles were so ferocious, because the
stakes were so small. Describing sort of academia. And you start to think on
one level this is a description of insanity. Why would people fight like
crazy when the stakes are so small? But it's also, I think simply a function of
the logic of the situation. When it's really hard to
differentiate yourself from other people. When the differences are,
when the objective differences
really are small. Then you have to compete
ferociously to maintain a difference of one sort or another, that's often more
imaginary than real. There's always a sort of a
personal version of this that I tell where I was
sort of hyper tracked. My 8th grade junior high
school yearbook, one of my friends wrote in, I know you'll get into
Stanford in four years as a Sophomore, sort of when
it is going to Stanford four years later, the end of high
school. Went to Stanford Law School. You know, ended up at a big
law firm in New York, where from the outside
everybody wanted to get in. On the inside everybody
wanted to leave. >> And it was this very
strange dynamic, where after I sort of realized that this
was not the best idea, and left after seven months
and three days. You know, one of the people
down the hall from me told me, it's really reassuring
to see you leave, Peter. I had no idea that it was
possible to escape from Alcatraz. Which of course, all you had
to do was go out the front door and not come back. But so much of people
identities got wrapped in winning these
competitions, that they somehow lost site
of what was important. What was valuable. And you know, competition
does make you better at whatever it is you're
competing on. Because when you're
competing, you're comparing yourself
with the people around you. You're figuring out, how do I beat the people
next to me? How do I do somewhat better
at whatever it is they're doing. And you will get better at
that thing. I'm not questioning that,
I'm not denying that. But, it often comes at this
tremendous price that you stop asking some bigger
questions, about what's truly important
and truly valuable. And so I would say, don't
always go through the tiny little door that everyone's
trying to rush through. Maybe go around the corner,
and go through the vast gate
that no one's taking. Thank you very much. I guess there's time for, do you want to take a few
questions? >> Sorry? >> Oh yes, people want to
take, I'll take a few questions
with few minutes time. Yeah, go ahead. >> Since, yeah, as you
mentioned, you already mentioned
further competition often look similar because the
narrative of people tell our selves. Do you have any ways to easily determine the
difference when your looking at an idea that is
better than your own idea? >> Well I'd say the question
I always try to focus on is what is the actual market? So not what's the narrative
of the market, because you can always tell
a fictional story about a market that's much bigger
or much smaller. But what is the real
objective market? So, it's always, yeah, you
always try to figure it out. And you realize people have incentives to powerfully
distort these things. Yeah? >> Which of the aspects of
monopolies that you mentioned would you say
>> Well they have network effects
with the ad network. They had proprietary
technology that gave them the initial lead, because
they had the page rank algorithm which was
sort of, an order of magnitude better than any
other search engine. You have economies of scale, because of the need to store
all these different sites. And at this point, you have
brand, so Google has all four. Maybe the proprietary
technology's somewhat weaker at this point. But, definitely, it had all
four, and maybe three out of four now. Yeah. >> How does this apply to
and, second, what's it like. The seconds what? >> What's with the i-Phone?
>> That's sort of a set of companies
that are doing different copycat payment
systems on mobile phones. There's Square, there's
PayPal. They just have sort of
different shapes. That's how they
differentiate themselves. One is a triangle, one is a
square. And so you know... >> Maybe at some point the
apes weren't out of shape or something like that. But I think, pounds here we
started with focus on the intelligence community
which is small sub-market, you had a proprietary
technology that used a very different approach. Were it was focused on the
human computer synthesis rather
than the substitution, which I think is the
dominant paradigm. So there's a whole set of
things I would say on the market approach, and on
the proprietary technology. Yes? >> When you have design
thinking methodology in a start-up thinking, which
is used to mitigate risk by not creating things that
people don't want. But I think young innovators
have inspiration create complex systems that last's
through time. >> Could you repeat the
question? >> Yeah.
So the quest is what do I think about lean start-up's,
iterative thinking, where you get feedback from
people, versus complexity that may
not work. So, I am personally quite
skeptical of all the lean start-up methodology. I think the really great
companies did something that was, sort of. Somewhat more of a quantum
improvement that really differentiated them
from everybody else. They typically did not do
massive, you know, customer surveys. The people who ran these
companies sometimes, not always, suffer from mild
forms of Aspberger's, so they were not actually that
influenced, not that easily deterred by
what other people thought or told them to do. So I do think we're way too
focused on iteration as a modality, and not enough
on trying to have a virtual esp link with the public and
figuring it out ourselves. I would say that, the risk
question is always a very tricky one
because there are, you know? They're, they're, it's not,
it's often. I think it's often the case
that you don't have enough time to
really mitigate risk. If, if you're gonna take
enough time to figure out what people want. You often will have missed
the boat by then. and, and then, of course,
there's always the risk of, of doing something that's,
that's not that, significant or meaningful. So, you know?
You could say a track in law school is a low risk
track from one perspective, it may still be
a very high risk track in the sense that maybe your
not, have a high risk of not doing something
meaningful with your life. So, we have to think about
risk in these, very complicated way. I think risk is for a very
complicated concept. Yes.
I was just checking for the last advantage, but then
doesn't that imply that there's already
competition to begin with between the chess pieces on
the chess board? >> Yeah, so, there's always
this terminology thing, so I would say that there
are categories in which people sort of are
bundled together. I would say the monopoly
businesses were in effect they really were a big first
mover in some sense. You could say Google was not
the first search engine. There were other search
engines before, but on one dimension, they were dramatically
better than everybody else, they were the first one with
page rank, with sort of an automated
approach. Facebook was not the first
social networking site. My friend, Reed Hoffman,
started one in 1997, and they called it Social
Net. So they already had the
name, Social networking, in the
name of their company, seven years before Facebook. Their idea was that it was
gonna be this virtual cyberspace, where I'd be a
dog and you'd be a cat. And we'd have all these
different rules about how we'd interact with each
other. >> In this virtual alternate
reality. Facebook was the first one
to get real identity. So, it was, so I would say, I hope Facebook will be the
last social networking site, it was the first one in a
very important dimension. People often would not think
of it as the first because they, sort of, lump all
these things together. >> I have one more question. >> Okay, one question, let's
take one here. >> If you're theoretically
someone who, worked at Golden College and
left there after six months, and is now going to do
science at Standford. How would you recommend
rethinking >> I don't have a great, I'm not great at the
psychotherapy stuff so I don't quite know how to
>> solve this. There are these very odd
studies they've done on people who go to
business school. There's one they've done at
Harvard Business school where it's sort of the
anti-Asperger, personality. We have people who are super
extroverted, generally have low
convictions, few ideas. And you have sort of a
hothouse environment. You put all these people in
for two years. And at the end of it, they
systematically end up, the largest cohort
systematically ends up doing the wrong thing. They tried to catch the last
wave. You know in 1989 everyone in
Harvard tried to work for Mike Milken, it was one or two years before he went to
jail for all the junk bond stuff. They were never interested
in Silicon Valley or tech, except for '99 and
2000 when they timed the dot com bubble peaking
perfectly. They did, and then '05 to
'07 was housing. Private equity, stuff like
this. I do think this tendency for us to see competition as
validation is very deep. I don't think there's any
sort of easy psychological formula
to avoid it. I don't know what sort of
therapy to recommend. >> But my first. My first starting point, which is only like maybe ten
percent of the way, is to never under estimate
how big a problem it is. We always think this is something that afflicts
other people. It's easy for me to point to people in
business schools or people at Harvard or people on Wall
Street, I think it actually does afflict all of us to a
very profound degree. We always think of
advertising as things that work on other
people. How, who are all these
stupid people who fall for all those ads on tv, they obviously work to some
extent and they work, to a disturbing
extant on all of us. And it's something we, we
all should work to overcome. Thank you very much.
