Lecture 5 - Competition is for Losers (Peter Thiel)

All right, all right, good afternoon. Uh, today's speaker is Peter Thiel. Peter was the founder of PayPal, Palantir, and Founders Fund, and has invested in, uh, 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. Uh, Sam, thanks for inviting me, thanks for having me.

Uh, I sort of have a single thesis that I'm completely obsessed with on the business side, which is that, uh, if you're starting a company, if you're the founder entrepreneur starting a company, you always want to aim for monopoly. And, um, and that, uh, you want to always avoid competition. And so, uh, hence, uh, competition is for losers, uh, something we'll be talking about today.

I'd like to, um, I'd like to start by saying something about, um, the basic idea of, uh, when you start one of these companies, um, how you go about, uh, creating value. And there's this question: what makes a business valuable? And I want to suggest that there's basically a very simple, uh, very simple formula that, um, you have a valuable company if two things are true.

Uh, 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, uh, I think people always miss in the sort of analysis is that X and Y are completely independent variables.

And so, um, X can be very big; Y can be very small. X can be of intermediate size, and if Y is reasonably big, you can still get a very big business. So to create a valuable company, you have to basically, uh, both create something of value and capture some fraction of the value of what you've created.

And sort of just to illustrate this as a contrast, um, there's—if you sort of compare the, uh, US airline industry with a company like, uh, Google on search, uh, if you sort of measure by the size of these industries, you could say that airlines are still more important than search. If you just measure it, say, by revenues, it was 195 billion in, uh, domestic revenues in 2012. Google had, uh, just north of 50 billion.

And so, and certainly sort of on some intuitive level, if you said, uh, 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 looked at this globally, um, airlines are much, much bigger than, um, than, uh, than, than search, than Google is. But, uh, but the profit margins are quite a bit less. You know, they were marginally profitable in 2012. I think the entire 100-year history of the airline industry, the cumulative profits in the US have been approximately zero.

No companies make money; they episodically go bankrupt, they get recapitalized, and you sort of cycle and repeat. And this is reflected in, you know, the combined market capitalization of the airline industries—maybe, uh, something of the US airline industry, something like a quarter that of Google.

So, you have search engines much, much smaller than air travel, but much more valuable. And I think this reflects these very different, uh, valuations on X and Y. So, um, you know, if we look at perfect competition, um, you know, there are sort of—there's some pros and cons to the world of perfect competition.

Um, on a high level, uh, it's always—um, this is what you study in econ one. It's always easy to model, which I think is why econ professors like talking about perfect competition. Um, it somehow is efficient, especially in a world where things are static, because you have all the consumer surplus gets captured by everybody.

And, uh, politically, it's, uh, what we're told is good in our society— that you want to have competition, and this is somehow a good thing. Um, of course, there are a lot of negatives. Uh, it's generally not that good if you're, you're, um, you're involved in anything that's hyper-competitive, um, because you often don't mak...