The competitive search for monopoly

In today’s New York Times, David Brooks argues that a competitive and creative spirit may be substitutes.

We live in a culture that nurtures competitive skills. And they are necessary: discipline, rigor and reliability. But it’s probably a good idea to try to supplement them with the skills of the creative monopolist: alertness, independence and the ability to reclaim forgotten traditions.

Everybody worries about American competitiveness. That may be the wrong problem. The future of the country will probably be determined by how well Americans can succeed at being monopolists.

Let me quickly translate: if you are competitive, you might like to enter an existing market and capture market share (this is sometimes called disruption but don’t get me started on that). On the other hand, if you are creative you come up with really new things that no one has thought of. If you create a new market, you essentially get a monopoly over that market for a time. Brooks is arguing that perhaps people should be doing more of the latter than the former.

His case in point is a series of lectures of Peter Thiel who founded Paypal and played a big role in Facebook. But did he get there through creativity or competition? Dan Drezner deals with Facebook and says that seems more competitive. His argument is that the idea of a social network was hardly new but Facebook were the first ones to get it really right.

What about Paypal? Was that really creative? Here is the paraphrase from Thiel’s lectures (transcribed by a Stanford law student):

PayPal’s original idea involved beaming money to people over Palm Pilots. It was voted one of the worst 10 business ideas of 1999, which is saying a lot. The initial business model was hardly better; there was a sense in which PayPal had to raise money so it could raise more money so it could then figure out what to do with all that money. And, oddly enough, it was possible to raise an angel round on that model; one archetypical angel investor, during a pitch over Chinese food at Town & Country in Palo Alto, was utterly unconcerned with what PayPal did. Rather, he wanted to know one thing: who else was investing. Later, he consulted the fortune cookie. It told him to invest.

Among the first big breaks was landing a $4.5M investment from Nokia ventures. The problem, though, was that mobile Internet didn’t quite work yet. Good interfaces were years away, and integration with handsets seemed to take forever. Much to Nokia’s surprise, PayPal announced a pivot at the first post-investment board meeting. The new idea was simple: an account-based system where you could send money to anyone with an e-mail address. It was a good idea, but it seemed too easy. Surely, serious competition had to be working on that, too. So 1999 became increasingly frantic, since people knew they had to move quickly or fail.

Paypal’s idea was a simple one but it seems that Thiel didn’t actually believe it was that creative — so much so that they pulled out all stops to get ahead of competition he thought would be there.

Thiel goes on to use Zygna as an example of what he is talking about.

Zynga is another interesting case. Mark Pincus has wisely said that, “Not having clear goal at outset leads to death by a thousand compromises.” Zynga executed very well from the beginning. They started doing social games like Farmville.    They aggressively copied what worked, scaled, figured out how to monetize these games—how to get enough users to pay for in-game perks—better than anyone else did. Their success with monetization drove the viral loop and allowed them to get more customers quickly.

The question about Zynga is how durable it is. Is it a creative or non-creative business? Zynga wants the narrative to be that it’s not a creative or a design company. If it is, the problem is that coming up with new great games is hard. Zynga would basically just be game version of a Hollywood studio whose fortunes can rise or fall with the seasons. Instead, Zynga wants the narrative to be about hardcore psychometric sauce. It’s a better company if it’s figured out how psychological and mathematical laws give it permanent monopoly advantages. Zynga wants, perhaps needs, to be able to truthfully say, “we know how to make people buy more sheep, and therefore we are a permanent monopoly.”

I’m not sure Brooks got that far into the lecture and I suspect he isn’t going to ask politicians to use Zynga as the big example as to what the world needs. But that doesn’t stop it from being true that Zygna mastered something and has profited from it.

The problem with the narrative of competition versus creativity is not that it doesn’t provoke one into thinking, it is that it doesn’t seem to describe anything real. The most creative innovation that  I can recall in recent times was the Segway. It is still pretty darn magical. Was it successful? Nope. Why? We could go on. But one reason is that Segway pursued a strategy that kept it secret until it was ready to go big time. The problem with really new things is that they aren’t always ready for the big time right away as people have to get used to the idea. Perhaps Segway should have started in a niche and moved on from there. Indeed, Thiel may well agree.

All these companies are different, but the pattern is the same: start with a small, specific market, scale up, and always have an account of how robust you are going forward. The best way to fail is to invert this recipe by starting big and shrinking., Webvan, and made this mistake. There are many modes of failure. But not being honest about objective market conditions is a sort of failure paradigm. You can’t succeed by believing your own rhetoric over reality except by luck.

While that sounds like avoiding competition, it is something different as the big scale strategy didn’t take on much competition either; except maybe the competition for acceptance within people’s minds.

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