Monopolies and Duopolies: Competition is For Losers?

Peter Thiel, a renowned entrepreneur and venture capitalist, has extensively shared his distinctive views on competition and monopolies, most notably through his popular book 'Zero to one.' Thiel asserts that striving for a monopoly, rather than competing in an existing market, is crucial for a business's success, encapsulating this belief with the phrase 'Competition is for losers.' This article delves into Thiel's thinking on the subject and examines some of the most well-known monopolies and duopolies around the world.

• Peter Thiel's philosophy on monopolies: Thiel suggests that the greatest possible business successes stem from creating unique products or services that face no competition.

• Examples of monopolies: Standard Oil, AT&T, and modern giants like Microsoft and Google (Alphabet), showcase that immense market control enables abnormally high profitability.

• Duopolies in various industries: Duopolies such as Boeing and Airbus in the commercial aircraft industry, and Intel and AMD in the PC CPU market, underscoring how two companies can dominate an industry, influencing pricing power and business endurance.

Thiel's philosophy is rooted in the belief that true business success comes from creating something of unique value and capturing a significant portion of that value. He distinguishes between two types of businesses: monopolies and perfect competitions, or non-monopolies. Monopolies, in his view, are businesses that have managed to create unique products or services that stand out so much from their competition that they effectively have no competition. These companies can capture a large part of the value they create, leading to significant profits and sustainable success. In contrast, businesses in perfect competition face thin margins and intense rivalry that hinders profitability and long-term growth.

Peter Thiel advises new businesses to seek to become monopolies by starting in small, niche markets and expanding from there. He emphasizes the importance of being unique and creating a new market space where the business can set its own rules rather than trying to outperform in a crowded and competitive field. This strategy involves focusing on innovation and offering something so different that it's not directly comparable to existing products or services. He also highlights the "last mover advantage," suggesting that the most lasting and valuable businesses are those that enter a market late but with a product or service that is so superior that it dominates the market for the long term​​.

Thiel has made early-stage investments in numerous startups with the previously mentioned characteristics, either personally or through Founders Fund, including Meta, Airbnb, Spotify, SpaceX, Palantir Technologies, and PayPal.

As Thiel points out, monopolies and duopolies are often synonymous with high profitability due to the lack of competition. Not surprisingly, many of the world's most esteemed companies hold monopolistic or near-monopolistic market positions, allowing them to enjoy substantial profit margins. This is particularly true in large markets, where such companies can also achieve significant revenue growth, making them some of the world's most valuable entities. From an investor's perspective, it should therefore be viewed as highly appealing to invest in companies with these structural advantages. Also, of course, provided that the multiple seems cheap in relation to the quality of the business.

A common theme among these companies is their emergence as first-movers, or nearly so, within their fields. Examples include Microsoft in computer operating systems and Alphabet (Google) in search engines. Here's a list of some of the most famous monopolies from different eras and sectors:

Founded by John D. Rockefeller in 1870, Standard Oil is often cited as the archetype of monopolies, likely because it was one of the first to achieve such vast size. By the early 20th century, it controlled about 90% of the U.S. oil refining industry. The company was eventually broken up in 1911 into 34 separate entities due to antitrust laws. Rockefeller's estimated net worth of $1.4 billion in 1937 was equivalent to 1.5% of the U.S. GDP, making him the richest individual in American business and economic history, a title he still holds according to this metric.

This monopolistic period, ranging from the 1910s through the early 1980s, was characterized by AT&T's control over the entire supply chain of telecommunications services and equipment. The company operated local and long-distance telephone services, manufactured telephone equipment through its subsidiary Western Electric, and conducted research and development (R&D) at Bell Labs, its engineering and scientific development wing.

This vertical integration allowed AT&T to maintain its monopoly for decades, setting prices and controlling access to telecommunications technology and the infrastructure. Before its breakup in 1984, AT&T was the sole provider of telephone services in the U.S. for a majority of the 20th century. The U.S. government eventually filed an antitrust lawsuit against AT&T, leading to a split into several smaller entities, collectively known as the "Baby Bells."

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Microsoft's period of dominance, particularly from the early 1990s through the early 2000s, was marked by its control over personal computer software, primarily through its Windows operating system and Microsoft Office productivity suite. Windows became the de facto standard operating system from the beginning of the personal computer era in the early 1990s, a position it still holds today.

The company's strategy, such as bundling its web browser with the Windows operating system and using its market power to establish preferential agreements with computer manufacturers, led to antitrust scrutiny and legal challenges. The most notable of these was the U.S. vs. Microsoft antitrust case in the late 1990s, where the company was accused of misusing its monopoly power to stifle competition. This period of regulatory scrutiny highlighted the challenges of balancing innovation with competition in the rapidly evolving technology sector, challenges that are perhaps more relevant today than ever before.

Google's period of dominance, particularly from the early 2000s onwards, has been characterized by its superiority through its search engine. The company's unparalleled algorithm for indexing and ranking web pages ensured that Google Search became synonymous with internet search, securing its position as the gateway to the web for users globally.

While not officially labeled a monopoly in every jurisdiction, its global market share of roughly 85% in search has led to numerous investigations and legal challenges. The company's strategies, such as prioritizing its own products in search results and bundling its services with Android, have in particular drawn scrutiny. These practices have resulted in various antitrust investigations and legal actions worldwide, reflecting broader concerns about the concentration of power among a few technology companies and their impact on competition, privacy, and access to information.

Formerly known as Facebook, Meta has emerged as a dominant force in social media and digital advertising from its inception in 2004 through the present. The company's dominance is marked by its acquisition and development of key platforms in the social media landscape, including Instagram, WhatsApp, and Messenger, alongside its original Facebook platform. These platforms are collectively used by over 3 billion users on a monthly basis worldwide, enabling Meta to amass an unparalleled amount of user data and an enormous global network effect.

This aggregation of platforms under the Meta umbrella has allowed the company to achieve a form of vertical integration within the digital and social media spaces. By controlling a vast network of social interactions and digital communication channels, Meta has been able to set the standards for user engagement, data collection practices, and digital advertising. The company's ability to leverage user data across its various platforms has given it a significant advantage in targeting advertisements, thereby increasing its share of global digital advertising revenue.

In contrast to monopolies, duopolies occur when two companies dominate a particular market or industry, leading to a competitive dynamic often similar to that of a monopoly – significantly influencing pricing and profitability. Here are some of the most well-known global duopolies:

The commercial aircraft sector is dominated by two major players: Boeing and Airbus. This duopoly has shaped the dynamics of the aviation market for decades, influencing airline choices, aircraft innovation, and global trade policies. Interestingly, the market share split between these two companies has long been close to 50/50, with Airbus increasing its market share to roughly 60% over the last five years.

Several structural advantages contribute to the endurance of this duopoly: Their superior ability to invest in R&D, the capital intensity to manufacture aircrafts at scale, along with their extensive service networks and deep ties with airlines and governments worldwide, provides a significant barrier to entry for new competitors.

The market for PC processors has long been dominated by two titans: Intel and AMD. Intel has historically held the larger share of the market, but AMD has made substantial gains in the last few years. Intel's market share stands at around 60% while AMD controls roughly 25% of the market.

Both Intel and AMD are known for their significant investments in R&D. These investments are crucial for staying at the forefront of semiconductor technology which is rapidly evolving. Doing this allows them to innovate continuously, improving processor performance, energy efficiency, and capabilities. The semiconductor industry is also capital-intensive. Developing new processors and manufacturing them, especially with advanced node sizes (7nm, 5nm, etc.), requires billions of dollars in investments each year. This high cost acts as a barrier to entry, limiting the number of competitors.

Further reading: Lisa Su: Transforming AMD and Shaping the Semiconductor Industry

In the soft drink industry, Coca-Cola and PepsiCo are the leading competitors, with Coca-Cola holding a dominant position in the carbonated soft drinks market with a nearly 48% market share, while PepsiCo commands approximately 24%.

Coca-Cola and PepsiCo not only compete in the carbonated soft drink market but also across a diverse portfolio of beverages. Coca-Cola's brands include Coca-Cola, Sprite, and Fanta, among others. PepsiCo's portfolio includes Pepsi, Mountain Dew, Tropicana, catering to a similar variety with sodas, juices, and sports hydration products. Coca-Cola and PepsiCo's competitive advantages are largely attributed to their strong brand presence and extensive distribution networks.

Further reading: The Coca-Cola and Pepsi Duopoly: The Secret Ingredients

The global payments processing market is dominated by Visa and Mastercard. These two companies account for 90% of all payment processing outside of China and have a combined market value of approximately $850 billion.

The best way to describe payment processing is as a digital counterpart to railroads. Just as goods cannot be transported by train without railroads, giving railroad owners significant control over transportation, so too do payment processors control digital transactions. If a new entity were to start building railroads, the costs would be prohibitive. Initial investments would yield little return, as a single railroad in, for example, Texas, would offer limited value if not connected to a broader network across America. The same applies to payment processing, arguably providing these companies with remarkably strong competitive advantages.

Further reading: Visa and Mastercard: The Global Payment Duopoly

Walmart and Costco dominate the American retail sector. Yet their combined market share, roughly 12% of U.S. retail, is significantly lower compared to other duopolies discussed in this article. Given the retail market size, the lack of scalable business models, and the reliance on physical infrastructure, this 12% represents an enormous portion of the market concentrated in just two players. Therefore, it's still arguably correct to classify the two as a duopoly.

Walmart is known for its vast product range, low prices, and convenience, catering to a wide demographic. Costco operates on a membership-based model, focusing on bulk sales at discounted prices. It targets customers looking for value in large quantities, including businesses and affluent shoppers, with a limited selection of items aimed at maintaining high quality and value.

Both retailers offer unique advantages: Walmart for its brand, broad assortment and one-stop shopping convenience, and Costco for its bulk purchasing benefits and membership perks.

Further reading:

• The Walton Family: The Dynasty Behind the Walmart Empire

• Investing Mastery with Nick Sleep: Nomad's Costco Investment

Peter Thiel's perspective on monopolies and duopolies challenges conventional views on competition, advocating for the strategic pursuit of monopoly status as the path to business success. By focusing on innovation and creating unique products or services, Thiel suggests companies can avoid the pitfalls of competition and instead secure sustainable profits and growth.

Through a detailed exploration of historical and contemporary examples, including Standard Oil, AT&T, Microsoft, Google, and notable duopolies like Boeing and Airbus, as well as Intel and AMD, the article underscores the significant impact these entities have on their respective industries. These monopolies and duopolies not only illustrate the immense profitability and market control achievable but also highlight the regulatory scrutiny they face.