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