Zero to One: Notes on Startups, or How to Build the Future

LIES PEOPLE TELL

How much of the world is actually monopolistic? How much is truly competitive? It’s hard to say, because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it’s easy to perceive only small differences between them.

But the reality is much more binary than that. There’s an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize.

The confusion comes from a universal bias for describing market conditions in self-serving ways: both monopolists and competitors are incentivized to bend the truth.

Monopoly Lies

Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.

Think about how Google talks about its business. It certainly doesn’t claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let’s say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.) If that doesn’t seem dominant enough, consider the fact that the word “google” is now an official entry in the Oxford English Dictionary—as a verb. Don’t hold your breath waiting for that to happen to Bing.

But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized U.S. search engine advertising, it would own just 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world.

What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones, and wearable computers. But 95% of Google’s revenue comes from search advertising; its other products generated just $2.35 billion in 2012, and its consumer tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it—a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention.

Competitive Lies

Non-monopolists tell the opposite lie: “we’re in a league of our own.” Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.

Suppose you want to start a restaurant that serves British food in Palo Alto. “No one else is doing it,” you might reason. “We’ll own the entire market.” But that’s only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well?

These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. It’s very possible they don’t exist.

In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View. We had our pick of restaurants, starting with obvious categories like Indian, sushi, and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was at that time the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all of those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.

Creative industries work this way, too. No screenwriter wants to admit that her new movie script simply rehashes what has already been done before. Rather, the pitch is: “This film will combine various exciting elements in entirely new ways.” It could even be true. Suppose her idea is to have Jay-Z star in a cross between Hackers and Jaws: rap star joins elite group of hackers to catch the shark that killed his friend. That has definitely never been done before. But, like the lack of British restaurants in Palo Alto, maybe that’s a good thing.

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets:

British food ∩ restaurant ∩ Palo Alto

Rap star ∩ hackers ∩ sharks

Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets:

search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars

What does a monopolist’s union story look like in practice? Consider a statement from Google chairman Eric Schmidt’s testimony at a 2011 congressional hearing:

We face an extremely competitive landscape in which consumers have a multitude of options to access information.

Or, translated from PR-speak to plain English:

Google is a small fish in a big pond. We could be swallowed whole at any time. We are not the monopoly that the government is looking for.