How to Build a Monopoly (Technology)
How to get more money from monopoly, having products, services, and skill that others don't have. You can dictate your price.
expand deliberately.
Start Small and Monopolize
Every startup is small at the start. Every monopoly dominates a large share of its
market. Therefore, every startup should start with a very small market. Always err on
the side of starting too small. The reason is simple: it’s easier to dominate a small
market than a large one. If you think your initial market might be too big, it almost
certainly is.
Small doesn’t mean nonexistent. We made this mistake early on at PayPal. Our
first product let people beam money to each other via Palm Pilots. It was interesting
technology and no one else was doing it. However, the world’s millions of PalmPilot
users weren’t concentrated in a particular place, they had little in common, and they
used their devices only episodically. Nobody needed our product, so we had no
customers.
With that lesson learned, we set our sights on eBay auctions, where we found our
first success. In late 1999, eBay had a few thousand high-volume “PowerSellers,”
and after only three months of dedicated effort, we were serving 25% of them. It was
much easier to reach a few thousand people who really needed our product than to
try to compete for the attention of millions of scattered individuals.
The perfect target market for a startup is a small group of particular people
concentrated together and served by few or no competitors. Any big market is a bad
choice, and a big market already served by competing companies is even worse. This
is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100
billion market. In practice, a large market will either lack a good starting point or it
will be open to competition, so it’s hard to ever reach that 1%. And even if you do
succeed in gaining a small foothold, you’ll have to be satisfied with keeping the
lights on: cutthroat competition means your profits will be zero.
Scaling Up
Once you create and dominate a niche market, then you should gradually expand
into related and slightly broader markets. Amazon shows how it can be done. Jeff
Bezos’s founding vision was to dominate all of online retail, but he very deliberately
started with books. There were millions of books to catalog, but they all had roughly
the same shape, they were easy to ship, and some of the most rarely sold books—
those least profitable for any retail store to keep in stock—also drew the most
enthusiastic customers. Amazon became the dominant solution for anyone located far
from a bookstore or seeking something unusual. Amazon then had two options:
expand the number of people who read books, or expand to adjacent markets. They
chose the latter, starting with the most similar markets: CDs, videos, and software.
Amazon continued to add categories gradually until it had become the world’s
general store. The name itself brilliantly encapsulated the company’s scaling
strategy. The biodiversity of the Amazon rain forest reflected Amazon’s first goal of
cataloging every book in the world, and now it stands for every kind of thing in the
world, period.
eBay also started by dominating small niche markets. When it launched its
auction marketplace in 1995, it didn’t need the whole world to adopt it at once; the
product worked well for intense interest groups, like Beanie Baby obsessives. Once it
monopolized the Beanie Baby trade, eBay didn’t jump straight to listing sports cars
or industrial surplus: it continued to cater to small-time hobbyists until it became the
most reliable marketplace for people trading online no matter what the item.
Sometimes there are hidden obstacles to scaling—a lesson that eBay has learned
in recent years. Like all marketplaces, the auction marketplace lent itself to natural
monopoly because buyers go where the sellers are and vice versa. But eBay found
that the auction model works best for individually distinctive products like coins and
stamps. It works less well for commodity products: people don’t want to bid on
pencils or Kleenex, so it’s more convenient just to buy them from Amazon. eBay is
still a valuable monopoly; it’s just smaller than people in 2004 expected it to be.
Sequencing markets correctly is underrated, and it takes discipline to expand
gradually. The most successful companies make the core progression—to first
dominate a specific niche and then scale to adjacent markets—a part of their
founding narrative.
Once you create and dominate a niche market, then you should gradually expand
into related and slightly broader markets. Amazon shows how it can be done. Jeff
Bezos’s founding vision was to dominate all of online retail, but he very deliberately
started with books. There were millions of books to catalog, but they all had roughly
the same shape, they were easy to ship, and some of the most rarely sold books—
those least profitable for any retail store to keep in stock—also drew the most
enthusiastic customers. Amazon became the dominant solution for anyone located far
from a bookstore or seeking something unusual. Amazon then had two options:
expand the number of people who read books, or expand to adjacent markets. They
chose the latter, starting with the most similar markets: CDs, videos, and software.
Amazon continued to add categories gradually until it had become the world’s
general store. The name itself brilliantly encapsulated the company’s scaling
strategy. The biodiversity of the Amazon rain forest reflected Amazon’s first goal of
cataloging every book in the world, and now it stands for every kind of thing in the
world, period.
eBay also started by dominating small niche markets. When it launched its
auction marketplace in 1995, it didn’t need the whole world to adopt it at once; the
product worked well for intense interest groups, like Beanie Baby obsessives. Once it
monopolized the Beanie Baby trade, eBay didn’t jump straight to listing sports cars
or industrial surplus: it continued to cater to small-time hobbyists until it became the
most reliable marketplace for people trading online no matter what the item.
Sometimes there are hidden obstacles to scaling—a lesson that eBay has learned
in recent years. Like all marketplaces, the auction marketplace lent itself to natural
monopoly because buyers go where the sellers are and vice versa. But eBay found
that the auction model works best for individually distinctive products like coins and
stamps. It works less well for commodity products: people don’t want to bid on
pencils or Kleenex, so it’s more convenient just to buy them from Amazon. eBay is
still a valuable monopoly; it’s just smaller than people in 2004 expected it to be.
Sequencing markets correctly is underrated, and it takes discipline to expand
gradually. The most successful companies make the core progression—to first
dominate a specific niche and then scale to adjacent markets—a part of their
founding narrative.
Don’t Disrupt
Silicon Valley has become obsessed with “disruption.” Originally, “disruption” was a
term of art to describe how a firm can use new technology to introduce a low-end
product at low prices, improve the product over time, and eventually overtake even
the premium products offered by incumbent companies using older technology. This
is roughly what happened when the advent of PCs disrupted the market for
mainframe computers: at first PCs seemed irrelevant, then they became dominant.
Today mobile devices may be doing the same thing to PCs.
However, disruption has recently transmogrified into a self-congratulatory
buzzword for anything posing as trendy and new. This seemingly trivial fad matters
because it distorts an entrepreneur’s self-understanding in an inherently competitive
way. The concept was coined to describe threats to incumbent companies, so startups’
obsession with disruption means they see themselves through older firms’ eyes. If
you think of yourself as an insurgent battling dark forces, it’s easy to become unduly
fixated on the obstacles in your path. But if you truly want to make something new,
the act of creation is far more important than the old industries that might not like
what you create. Indeed, if your company can be summed up by its opposition to
already existing firms, it can’t be completely new and it’s probably not going to
become a monopoly.
Disruption also attracts attention: disruptors are people who look for trouble and
find it. Disruptive kids get sent to the principal’s office. Disruptive companies often
pick fights they can’t win. Think of Napster: the name itself meant trouble. What
kinds of things can one “nap”? Music … Kids … and perhaps not much else. Shawn
Fanning and Sean Parker, Napster’s then-teenage founders, credibly threatened to
disrupt the powerful music recording industry in 1999. The next year, they made the
cover of Time magazine. A year and a half after that, they ended up in bankruptcy
court.
PayPal could be seen as disruptive, but we didn’t try to directly challenge any
large competitor. It’s true that we took some business away from Visa when we
popularized internet payments: you might use PayPal to buy something online
instead of using your Visa card to buy it in a store. But since we expanded the market
for payments overall, we gave Visa far more business than we took. The overall
dynamic was net positive, unlike Napster’s negative-sum struggle with the U.S.
recording industry. As you craft a plan to expand to adjacent markets, don’t disrupt:
avoid competition as much as possible.
term of art to describe how a firm can use new technology to introduce a low-end
product at low prices, improve the product over time, and eventually overtake even
the premium products offered by incumbent companies using older technology. This
is roughly what happened when the advent of PCs disrupted the market for
mainframe computers: at first PCs seemed irrelevant, then they became dominant.
Today mobile devices may be doing the same thing to PCs.
However, disruption has recently transmogrified into a self-congratulatory
buzzword for anything posing as trendy and new. This seemingly trivial fad matters
because it distorts an entrepreneur’s self-understanding in an inherently competitive
way. The concept was coined to describe threats to incumbent companies, so startups’
obsession with disruption means they see themselves through older firms’ eyes. If
you think of yourself as an insurgent battling dark forces, it’s easy to become unduly
fixated on the obstacles in your path. But if you truly want to make something new,
the act of creation is far more important than the old industries that might not like
what you create. Indeed, if your company can be summed up by its opposition to
already existing firms, it can’t be completely new and it’s probably not going to
become a monopoly.
Disruption also attracts attention: disruptors are people who look for trouble and
find it. Disruptive kids get sent to the principal’s office. Disruptive companies often
pick fights they can’t win. Think of Napster: the name itself meant trouble. What
kinds of things can one “nap”? Music … Kids … and perhaps not much else. Shawn
Fanning and Sean Parker, Napster’s then-teenage founders, credibly threatened to
disrupt the powerful music recording industry in 1999. The next year, they made the
cover of Time magazine. A year and a half after that, they ended up in bankruptcy
court.
PayPal could be seen as disruptive, but we didn’t try to directly challenge any
large competitor. It’s true that we took some business away from Visa when we
popularized internet payments: you might use PayPal to buy something online
instead of using your Visa card to buy it in a store. But since we expanded the market
for payments overall, we gave Visa far more business than we took. The overall
dynamic was net positive, unlike Napster’s negative-sum struggle with the U.S.
recording industry. As you craft a plan to expand to adjacent markets, don’t disrupt:
avoid competition as much as possible.
 |
| source |