Monopoly
One of Peter Thiel’s big ideas is what he calls “monopoly theory”: the idea that you want to start a business in an area where you can avoid competition.
Thiel is a prominent proponent of monopoly theory, but he is far from the only one. For several decades now, Warren Buffett and Michael Porter have expressed similar views. Buffett and Porter’s main argument is that a good business is one that differentiates itself from its competitors in a way that its competitors cannot imitate. This might mean having better technology that a competitor can’t imitate (due to a patent or some other reason), or it might be something less tangible, such as Facebook’s network effects.
Uber
Currently, Uber is not a monopoly. With well funded competitors launching in the same cities and the incumbent transportation system, Uber faces stiff competitor. In addition, switching costs are only downloading another ride sharing app. There currently aren’t any network effects, except the omnipresence of Uber, that keeps a person using them. In addition, because of stiff competition, the pricing is nearly identical with its competitors.
Classpass
Classpass is not a monopoly. It would not be too difficult to imitate the business model. However, they have been aggressive with signing up boutique gyms. Therefore, if they blanket a city, and drive enough business, they can create an artificial monopoly.
Square
Square is not a monopoly. Paypal and Intuit launched their own mobile credit card readers to compete with Square. On the POS front, there are a lot of companies that offer POS solutions for different types of business, including coffee shops, restaurants, and bike shops.
Groupon
Currently this are a lot of other daily deal sites that offer large audiences. Sites like LivingSocial and Amazon Local have comparable audiences and can drive similar customers. In addition, there aren’t any switching costs of going from one daily deal site to the other. In fact, Starbucks ran a deal with both sites.
Plated
Plated is not a monopoly. It currently has two direct competitors: Blue Apron and Hello Fresh. Because this is nothing proprietary about their service, they are at perfect competition with each other.
Airbnb
There are other companies in Airbnb’s space. VRBO, HomeAway, and OneFineStay are the bigger ones. Their indirect competitors include regular hotels, B&Bs, and hostels.
Rent the Runway
No, Rent the Runway is not a monopoly. Several companies like Lending Luxury to Bag Borrow and Steal to Rent Frock Repeat, have sprung up recently. The barrier to enter the market are low, however to scale the business is really tough. The difficulty lies in the logistics. To have enough dresses in different colors, and sizes that are clean and ready to ship at any moment can create a real barrier to execution.
Takeaway
You can still have a very successful business without being a monopoly. Although you do not need a complete monopoly in the whole industry, it would be sufficient to corner a marketshare. For example, Bloomberg, the financial software company, charges on average $20,000 a year per terminal. And they corner the market with a 30%+ market share. They are fine with only going after hedge funds and mutual funds, and excluding the ordinary investor.
Excercise
- Is your business a monopoly?
- Do you have any defensible patents or network effects? If not, how can you create some?
- Is there a part of your business that is defensible where a competitor cannot imitate because of relationships or industry knowledge?
Experience with past Citadines Group clients
We had a client who was getting into the activity tracker market. After doing a lot of competitive research, we realized that there is way too much competition. So we decided to niche down and gear the activity tracker towards kids. We built out apps that would notify parents on how active the kids were in and out of school. This way, the client was not directly competing with the other activity trackers, and was able to build a targeted monopoly.
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