Summary of ‘Zero to One’, Chapter 3: All happy companies are different

Summary: A company’s value is its profit. Profit is not based on size; it is based on profit margins, which are based on the level of competition. Profitable companies are monopolies. Our economy is starkly divided into monopolies (e.g. Google) and competitors (e.g. restaurants). But this stark division is hidden by the companies, and they hide it by lying about the true market they are in: Google hides its monopoly in “search” by claiming to be in “tech”; the restaurant hides its competition in “restaurants” by claiming to be “the only British restaurant in Palo Alto”. Determining a company’s true value requires defining the true market. We say monopolies are bad because they drive up prices. But while competition drives down prices, it also drives down wages, quality, and vision. Our economic models falsely assume that markets are static and fixed, making monopoly permanent; but in the real world, markets are created, making monopolies impermanent.

What valuable company is nobody building? Valuable to the company, not the world: airlines are huge but have razor-thin profit margins; Google is smaller but has a huge profit margin (21%). The different profit margins are explained by competition: airlines compete and destroy profit; Google doesn’t compete, so it can capture profit. Airlines are homogeneous and substitutable; their prices are based on cost. Google is clearly better than anyone else; their price is based on demand. We mythologize competition, but the best companies are monopolies.

The difference between monopolies and competitions is hidden by the players. Monopolies downplay their monopoly for legal reasons. Competitors downplay the competition to pretend that they are unique. Is Google a monopoly? It depends on what market you consider. Search, or advertising, or technology? Google claims to be a tech company, because it’s a monopoly in search. In competitive markets like restaurants, the competitors lie to themselves about their unique market: it might say “we’re the only British restaurant in Palo Alto” but in reality the market is just “restaurants in Palo Alto”. Competitors try to define their market as the set interaction; monopolists try to define their market as the set union.

Competition in restaurants drives down prices, but also drives down wages, drives them to put their children to work on the dishes, drives them to ruthlessness or death. Google is different: it has transcended the struggle for profits. Because of this, wages are higher, people less stressed, projects more visionary. Escaping the struggle and becoming a monopoly is a good thing.

Good for whom? Our economic models say monopolies are bad for society because they cause high prices. But this is only true in a static model world, where the monopoly is just a rent collector. The real world is dynamic: new markets, new categories can be created; products and companies are not perfectly substitutable. In this world, monopolies are not a bad thing; they’re engines for creating new things, and they are impermanent. While the government cracks down on perceived monopolies, it also knows they are good: it issues patents, which are enforceable monopolies. “The history of progress is a history of better monopoly businesses replacing incumbents.”

Economists’ models are historical, inspired by 19th century physical models of interchangeable atoms and systems reaching equilibrium. The model is flawed. New creations necessarily happen outside of these models.

Tagged #zero-to-one, #summary.
👋 I'm Jim, a full-stack product engineer. Want to build an amazing product and a profitable business? Read more about me or Get in touch!

Similar posts

Similar posts

More by Jim

This page copyright James Fisher 2018. Content is not associated with my employer. Found an error? Edit this page.