From 0 to 1: unlocking the secrets of business and the future

Chapter 7 All Successful Businesses Are Different

Applying the counter-mainstream question we asked earlier to business, it would be: What worthwhile companies haven’t been founded?This question is also harder to answer than it seems, because your company is not very valuable in itself, but it can already create value.Creating value is not enough, you must also be able to capture part of the value you create.

This means that even large companies can be poorly run.For example, U.S. airlines serve millions of passengers every year and create hundreds of billions of dollars in value.But in 2012, when plane fares averaged $178, airlines only made 37 cents per passenger per flight.Google, on the other hand, created relatively little value, but profited much more from it.Google generated only $2012 billion in value in 500 (compared to $1600 billion for airlines), but earned 21% of its profits—a profit margin more than 100 times that of the airline industry that year.Google's huge profits make it more than three times as valuable as all U.S. airlines combined.

There is competition among multiple airlines, but Google has only one.Economists explain these two phenomena with two simple models: one is perfect competition and the other is monopoly.In the first lesson of introductory economics, "perfect competition" is an ideal, default state.A so-called perfectly competitive market reaches equilibrium when supply and demand are equal.Every firm in a competitive market is indistinguishable from each other and sells the same product.Because these companies have no market power, their product prices must be set by the market.If there is money to be made, new companies will enter the market.Thus supply rises, prices fall, and the profits that attracted these new firms in the first place disappear.If too many companies enter the market, these companies will lose money and some will go out of business.Eventually the price will rise back to a sustainable level.Under perfect competition, no firm will gain economically in the long run.

The opposite of perfect competition is monopoly.Competitive firms have their products priced by the market, while monopolies have their own market and can set their own prices.Without competition, a monopoly firm can freely determine the quantity of supply and price in order to maximize profits.

In the eyes of economists, monopolies are the same no matter how they were established, whether they outmaneuvered competitors, obtained licenses from the government, or climbed to the top through innovation.In this book, we do not discuss illegal bullies, nor do we deal with government favorites.The "monopoly" here refers only to a kind of enterprise that supplies consumers with products that other enterprises cannot supply.Google is an example of going from 0 to 1: since the beginning of the 21st century, Google has left Microsoft and Yahoo far behind, and is unrivaled in the field of web search.

Americans made a myth of competition, praising it for saving them from the embarrassment of queuing for bread.In fact, the concepts of capitalism and competition are just the opposite.Capitalism is based on the accumulation of capital, and under perfect competition, profits disappear.The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't just follow suit and build a nondescript business.

corporate lies
How many truly monopolized markets are there in the world?How many truly competitive markets are there?It's hard to say, because our understanding of monopoly and competition is inherently vague.To an outsider, all businesses are the same, and they can only see some subtle differences between the two.

But the reality is more polarizing.There is a huge difference between perfect competition and monopoly, so most businesses are closer to one of these two extremes than we think.

Our vague notions of the two stem from the fact that firms describe markets in their own favor: both monopolies and competitors are happy to distort the facts to protect their own interests.

monopoly lie
Monopolies lie to protect themselves.They know that flaunting a monopoly will lead to inspections, audits, and even attacks, so in order to continue to obtain monopoly profits undisturbed, they will find ways to conceal the fact of monopoly, usually by exaggerating (non-existent) competition.

It is conceivable that Google will certainly not claim to be a monopoly to the outside world.But is it a monopoly?It depends: what does it monopolize?Let's analyze it together.Google started as a search engine.By May 2014, it had 5% of the market. (Its closest rivals, Microsoft and Yahoo, have roughly 68 percent and 19 percent, respectively.) And if that wasn't enough of an indication of its superiority, there's the fact that "Google" has been codified as a verb in the Oxford English Dictionary".And that's something Bing (a search engine from Microsoft) can't do.

But if Google started out as an advertising company, the situation is different.The size of the US search engine advertising market is $170 billion per year, and online advertising is $370 billion per year.The entire U.S. advertising market is $1500 billion, while the global market is $4950 billion.So even if Google completely monopolizes the US search engine advertising market, it only accounts for 3.4% of the global market.From this perspective, Google is just a humble pawn in this game.

What if we positioned Google as a multi-tech company?This assumption is reasonable, because in addition to search engines, Google also makes a dozen other different software products, such as self-driving cars, Android phones, and wearable devices.But 95 percent of the revenue still comes from search engine advertising; other products generated just $2012 billion in 23.5, and products aimed at tech consumers accounted for only a fraction of that.Google accounts for less than 9640% of the $0.24 billion global consumer technology market—a far cry from a monopoly.Google has positioned itself as a tech company that can hide from attention and trouble.

The lie of the non-monopoly
The lie of the non-monopoly is the opposite of the monopolist who, instead of exaggerating the rivalry, will say, "We are in a league of our own." biggest mistake.And the deadliest temptation is to describe the market too narrowly, as if you can control it for granted.

If you wanted to open an English restaurant in Palo Alto, California, you might say, "Nobody's opening an English restaurant there, we own the whole market." Unless there's a clear need for British food, Otherwise what you say is wrong.What if the reality is that the local restaurant market dominates?What if all the restaurants in nearby towns were part of the market?
These are tough questions, but the bigger problem is that you simply don't want to ask yourself these questions.When you hear that most new restaurants close within a year or two, your instinct will tell you - that's certainly not the case with yours.You'll try to prove to people that you're the exception instead of seriously thinking about whether that's the case.You'd better stop and think about whether there are consumers in Palo Alto who are keen on British food, and there is a good chance that there are no such consumers at all.

In 2001, my colleagues at PayPal and I often had lunch on Castro Avenue in Mountain View (also translated as Mountain View).We start with the most common cuisines for restaurant selection, such as Indian, Sushi, Burgers.When we settle on a cuisine, there are more choices: North Indian, South Indian, cheap, expensive, etc.Compared with the local restaurant market, which was so competitive, PayPal was the only company in the world developing an email payment system at the time.We employ fewer people than the restaurants on Castro Street, but our business is worth far more than those restaurants put together.It's hard to make money opening a South Indian restaurant.If you ignore the fierce competition and only see the subtleties of your restaurant—maybe you think your chapatis are great because your great-grandmother gave you a great recipe—then your business is not doing well. likely to continue.

The creative industries follow the same principle.No screenwriter wants to admit that his new screenplay is just old wine in new bottles.Instead, they're more than happy to hear: "This movie brings exciting elements together in a new way." Maybe that's true.Let’s say his idea is to cast Jay the Rapper in a cross between Hacker and Jaws: a rapper joins an elite group of hackers and goes off to catch a shark that killed his friend.It's definitely unprecedented, but like Palo Alto's lack of British restaurants, there's probably a reason for that.

Non-monopolists exaggerate their uniqueness by defining their market as the intersection of various smaller markets:
British food ∩ restaurant ∩ Palo Alto

rapper ∩ hacker ∩ shark
Instead, monopolies camouflage their monopoly by describing their market as the union of several large markets:
Search Engine ∪ Mobile Phone ∪ Wearable Device

Computer ∪ Self-Driving Car

What about the reality of the union story that the monopolists themselves made up?Let’s take a look at what Google Chairman Eric Schmidt said at a congressional hearing in 2011:
We face an extremely harsh competitive landscape, where consumers have a plethora of choices to access information.

Translating this PR statement into a more straightforward statement is:

Google is just a small fish in a big pond, we could be swallowed at any moment, we are not the monopoly that the government is looking for.

ruthless market

The problems of competing businesses go far beyond profits.Imagine if you were running a restaurant in Mountain View, and your restaurant didn't stand out from the dozens of competitors, and you had to work hard to keep it afloat.If you provide consumers with affordable food and make little profit for yourself, you can only pay your employees minimum wage.And you have to reduce unnecessary expenses, and even reduce work efficiency: this is why it is common to see grandma greeting at the front desk and children washing dishes in the background in small restaurants.Even high-end restaurants are not much better, with star rating systems like Michelin fueling fierce competition and driving chefs crazy. (French chef Bernard Loiseau, winner of three Michelin stars, once said: "If I lose a star, I will kill myself." Loiseau kept his rating, but he committed suicide in 2003 , because a French restaurant guide downgraded its restaurant.) Competitive ecosystems turn people into ruthless people, even taking their lives.

A monopoly like Google is different.Because it does not have to worry about competing with other companies, it has greater autonomy to care about its employees, products and influence in the wider world.Google's motto—"Don't be evil"—is partly a brand strategy, but it also shows the characteristics of a successful company—even if it strictly abides by ethics, it will not affect the company's development.In the business world, money is everything, or at least very important.A monopoly can afford to think about other things besides making money, a non-monopoly can't.In perfect competition, companies focus on short-term interests, and it is impossible to make long-term plans for the future.There is only one way to extricate a business from the daily race for survival: monopoly profits.

monopoly capitalism
Therefore, monopoly is good for those inside the industry, but what about those outside the industry?Does the huge profit come at the expense of others in society?In fact, it is true: profits come out of the pockets of consumers, and monopolies naturally have a bad reputation—but only in a world that does not change.

In a static world, monopolies are simply rent collectors.If you monopolize the market, you can raise the price of your product; others have no choice but to buy from you.It's like a famous board game: title deeds rotate between players, but the rules of the game never change, and you can't win the game by reinventing a better method of real estate development.In the game, the relative value of real estate is fixed, so all you can do is try to buy them all.

But the world is dynamic, and we can create new and better things.Creative monopolies create something new and give consumers more choice.Creative monopolies not only do not have a bad influence on the outside world, on the contrary, they are the driving force for the betterment of society.

Even the government knows this, so there is a department dedicated to creating monopolies (patenting new inventions), even though there is another department trying to kill them (antitrust measures).One might question: Should a person be granted legally protected exclusivity just because he was the first to come up with a good idea, such as designing software for a mobile phone?But we can clearly see that the monopoly profit brought to Apple by the design, production and marketing of the iPhone is a reward for Apple, rewarding it for enriching the world instead of artificially causing scarcity, and consumers are willing to pay high prices Buy a good smartphone.

The dynamism of emerging monopolies explains why established monopolies do not resist innovation.Led by Apple Inc.'s iOS system, the rise of mobile computing quickly pushed Microsoft from its decades-long dominance of the operating system.Before that, Microsoft's software monopoly replaced the hardware monopoly of IBM in the 20s and 60s.For most of the 70th century, telephone service was monopolized by AT&T, and now everyone can buy a cell phone from any provider.If the tendency of monopolies is to impede progress, then we should resist such dangerous enterprises.But the history of progress is actually a process of continuous renewal of monopoly enterprises.

Monopolies drive social progress because years or even decades of monopoly profits are a powerful incentive to innovate.Monopolies will then continue to innovate, because profits give them the capital to plan for the long-term future, and they can afford to invest in ambitious research projects that firms locked in competition can't dream of.

That being the case, why are economists obsessed with competition among enterprises and regard competition as an ideal state?This is a question left over from history.Economists took their ideas from 19th-century physicists: they saw individuals and businesses as interchangeable atoms rather than unique creators.Their theory describes the equilibrium state of perfect competition because it is easy to model, not because it represents the optimal state of firm development.But it's worth noting that in this long-term equilibrium, derived from 19th-century physics, all energy is evenly distributed and everything comes to a standstill—also known as the cosmic heat death (when the universe When the entropy reaches the maximum value, all other effective energy in the universe has been converted into thermal energy, and the temperature of all matter reaches thermal equilibrium).Whichever way you think about thermodynamics, it's a good comparison: in the business world, equilibrium is static, and static is death.If your company is in competitive equilibrium, its disappearance has no effect on the world, and other competitors that are not much different from your company are ready to take your place at any time.

Perfect equilibrium probably describes the void state of most of the universe, and even characterizes many corporations.But each new invention comes a long way from equilibrium.In the real world, outside of economic theory, every business succeeds precisely because it does what other businesses cannot.Therefore, monopoly is not the crux of the business world, nor is it an abnormal existence, but a portrayal of every successful enterprise.

Tolstoy begins Anna Karenina with this passage: "Happy families are always alike, and unhappy families are each unhappy in its own way." In business, the opposite is true.Businesses succeed for different reasons: each monopoly achieved monopoly position by solving a unique problem; and businesses fail for the same reason: they cannot escape competition.

(End of this chapter)