Summary of ‘Zero to One’, Chapter 5: Last mover advantage
Summary:
Since a company’s value is its future cash flow,
high growth is not enough:
the company must also endure.
Trendy companies can be over-valued:
a nightclub lives for a few years;
Zynga can’t make more Farmvilles;
and Groupon can’t retain companies.
Truly valuable companies are monopolies in durable markets.
There are four common properties of a market which makes its monopolies durable.
Property 1: significantly superior proprietary tech (e.g. Google Search)
is monopolistic because no one can reproduce it.
Property 2: network effects (e.g. Facebook friends)
are monopolistic because smaller companies have a smaller network.
Property 3: high fixed costs (e.g. software development)
are monopolistic because smaller companies are punished more relative to their revenue.
Property 4: branding is by nature monopolistic,
and the best monopolies integrate their brand deeply into the product,
e.g. Apple Macbook Pro.
To build a monopoly, you should monopolize early.
Sequence the markets you target:
start small and build out
(e.g. eBay originally only targeted obsessive collectors; Amazon only sold books).
Don’t “disrupt”;
instead find a niche where you don’t have to disrupt.
But don’t be the first mover into a big market;
instead, wait and be the last mover once you’re big enough to keep the market.
Monopoly is only great if it can endure.
Twitter is valued higher than The New York Times
because of the expectation that it will capture monopoly profits in the future.
“The value of a business today is the sum of all the money it will make in the future.”
To compare companies, compare their projected future cash flows:
this is why a nightclub (low-growth, short-term, trendy)
is worth less than a startup (high-growth, long-term, monopolistic).
Tech startups often lose money for many years,
in the expectation of future revenue.
“Most value will come 10-15 years in the future.”
LinkedIn is projected to have almost all its lifetime cash flow in the future.
So companies must grow and endure; not just grow.
Investment is frequently thrown at high-growth companies without long-term durability.
Zynga is fashionable, but they don’t have a recipe for making another Farmville.
Groupon convinced lots of companies to join, but doesn’t know how to keep them.
So don’t focus on the growth numbers.
Instead focus on the factors which result in big future long-term cash flows.
There are four common factors: proprietary tech, network effects, economies of scale, and branding.
They all lead to big future cash flows because they all lead to monopoly.
1: Superior proprietary technology is monopolistic because it is difficult to replicate.
Think Google Search - no one else knows how to do it.
The easiest way to get superior proprietary tech is
to create something new in a new market (say, a cure for baldness).
In an established market, such technology must be at least 10x better - a quantum improvement.
PayPal was at least 10x better than the previous payment system on eBay.
Amazon was 10x better than other online bookstores
because it was really a “book broker” ordering from other suppliers,
allowing it to sell any book.
The iPad was 10x better than any existing tablet
because it was a full integrated product.
2: “Network effects make a product more useful as more people use it” -
they have positive feedback.
Networks are monopolistic because new companies have no network.
You cannot build on network effects alone -
your product must be useful to the very first users.
You can increase network effects by gradually expanding the target network -
Facebook first targeted Harvard students,
where network effects are intense.
3: Economies of scale are monopolistic
because smaller companies are punished by the fixed costs.
Software is an extreme:
the fixed costs are everything,
and the costs of a new user are near zero.
Service businesses are the other extreme:
you can’t scale a yoga class.
4: All companies are granted a monopoly on their branding.
True monopolies have a powerful brand.
Apple’s brand is hard to imitate even if it were legal:
it is built into the core product
(superior machining and proprietary tech).
Yahoo has tried to rebrand as cool,
but has a worrying lack of substance -
brand alone is not enough.
How do you build a monopoly?
By monopolizing as early as possible.
Try to dominate a small, specific market.
(But don’t try to monopolize a non-existent market!)
Targeting “1% of a giant market” is a red flag:
it’s actually extremely hard to get that 1%,
and it will compete your profits to 0.
From there, sequence your markets.
Amazon started with books and monopolized it.
It expanded into DVDs and software:
similar markets which it could use the same distribution system on.
eBay targeted the obsessive hobbyist collector trade first,
like Beanie Babies.
Sometimes there are hidden obstacles to scaling.
The eBay auction house works well for collectibles but not for generic goods.
This was not seen in 2004,
and eBay’s value today is smaller than predicted.
“Disruption” is a buzzword.
It originally meant the replacement of an older tech with cheaper, newer tech,
e.g. PCs disrupted mainframes, and mobiles may be disrupting PCs.
Seeing yourself as “disruptive” encourages the language and behavior of competition.
PayPal wasn’t really disruptive:
it didn’t challenge anyone directly,
and gave Visa (et cetera) more money than PayPal took.
“First mover advantage” is fragile:
someone will come along and unseat you.
Better to be the last mover,
and you do that by sequencing markets,
taking your true target market when you are powerful enough.
Similar posts
Summary of ‘Zero to One’, Chapter 9: Foundations
Startups must get the foundations right from the start. Choose co-founders carefully, keep the board small, hire full-time employees, and compensate with equity over high salaries, even for the CEO. 2019-10-07
Summary of ‘Zero to One’, Chapter 8: Secrets
Valuable businesses are built on secrets - things that are hard but still doable. Look for secrets by thinking contrarily and exploring outside the mainstream. When you find a secret, share it only with the people you need to. 2019-01-27
Summary of ‘Zero to One’, Chapter 7: Follow the money
The power law distribution is key in venture capital, companies, and careers. Focus on finding and growing the few with vast potential, rather than trying to fix failures. 2018-09-23
Summary of ‘Zero to One’, Chapter 6: You are not a lottery ticket
The USA believes in the future is unpredictable but will get better. A false contradiction. Success is not random, as evidenced by serial entrepreneurs who have founded multiple billion-dollar businesses. 2018-09-19
Summary of ‘Zero to One’, Chapter 3: All happy companies are different
Profitable companies are monopolies, not competitors. Competition drives down prices but also wages and quality. Monopolies are not permanent, as new markets and products can create new monopolies. 2018-09-15
Summary of ‘Zero to One’, Chapter 2: party like it’s 1999
The dot-com bubble showed that conventional wisdom is often wrong. Lessons learned, like being “lean” and avoiding new markets, prevent bold visions and are the opposite of what companies like Google and PayPal needed. 2018-09-14
Similar posts
Summary of ‘Zero to One’, Chapter 9: Foundations
Startups must get the foundations right from the start. Choose co-founders carefully, keep the board small, hire full-time employees, and compensate with equity over high salaries, even for the CEO. 2019-10-07
Summary of ‘Zero to One’, Chapter 8: Secrets
Valuable businesses are built on secrets - things that are hard but still doable. Look for secrets by thinking contrarily and exploring outside the mainstream. When you find a secret, share it only with the people you need to. 2019-01-27
Summary of ‘Zero to One’, Chapter 7: Follow the money
The power law distribution is key in venture capital, companies, and careers. Focus on finding and growing the few with vast potential, rather than trying to fix failures. 2018-09-23
Summary of ‘Zero to One’, Chapter 6: You are not a lottery ticket
The USA believes in the future is unpredictable but will get better. A false contradiction. Success is not random, as evidenced by serial entrepreneurs who have founded multiple billion-dollar businesses. 2018-09-19
Summary of ‘Zero to One’, Chapter 3: All happy companies are different
Profitable companies are monopolies, not competitors. Competition drives down prices but also wages and quality. Monopolies are not permanent, as new markets and products can create new monopolies. 2018-09-15
Summary of ‘Zero to One’, Chapter 2: party like it’s 1999
The dot-com bubble showed that conventional wisdom is often wrong. Lessons learned, like being “lean” and avoiding new markets, prevent bold visions and are the opposite of what companies like Google and PayPal needed. 2018-09-14
More by Jim
What does the dot do in JavaScript?
foo.bar
, foo.bar()
, or foo.bar = baz
- what do they mean? A deep dive into prototypical inheritance and getters/setters. 2020-11-01
Smear phishing: a new Android vulnerability
Trick Android to display an SMS as coming from any contact. Convincing phishing vuln, but still unpatched. 2020-08-06
A probabilistic pub quiz for nerds
A “true or false” quiz where you respond with your confidence level, and the optimal strategy is to report your true belief. 2020-04-26
Time is running out to catch COVID-19
Simulation shows it’s rational to deliberately infect yourself with COVID-19 early on to get treatment, but after healthcare capacity is exceeded, it’s better to avoid infection. Includes interactive parameters and visualizations. 2020-03-14
The inception bar: a new phishing method
A new phishing technique that displays a fake URL bar in Chrome for mobile. A key innovation is the “scroll jail” that traps the user in a fake browser. 2019-04-27
The hacker hype cycle
I got started with simple web development, but because enamored with increasingly esoteric programming concepts, leading to a “trough of hipster technologies” before returning to more productive work. 2019-03-23
Project C-43: the lost origins of asymmetric crypto
Bob invents asymmetric cryptography by playing loud white noise to obscure Alice’s message, which he can cancel out but an eavesdropper cannot. This idea, published in 1944 by Walter Koenig Jr., is the forgotten origin of asymmetric crypto. 2019-02-16
How Hacker News stays interesting
Hacker News buried my post on conspiracy theories in my family due to overheated discussion, not censorship. Moderation keeps the site focused on interesting technical content. 2019-01-26
My parents are Flat-Earthers
For decades, my parents have been working up to Flat-Earther beliefs. From Egyptology to Jehovah’s Witnesses to theories that human built the Moon billions of years in the future. Surprisingly, it doesn’t affect their successful lives very much. For me, it’s a fun family pastime. 2019-01-20
The dots do matter: how to scam a Gmail user
Gmail’s “dots don’t matter” feature lets scammers create an account on, say, Netflix, with your email address but different dots. Results in convincing phishing emails. 2018-04-07
The sorry state of OpenSSL usability
OpenSSL’s inadequate documentation, confusing key formats, and deprecated interfaces make it difficult to use, despite its importance. 2017-12-02
I hate telephones
I hate telephones. Some rational reasons: lack of authentication, no spam filtering, forced synchronous communication. But also just a visceral fear. 2017-11-08
The Three Ts of Time, Thought and Typing: measuring cost on the web
Businesses often tout “free” services, but the real costs come in terms of time, thought, and typing required from users. Reducing these “Three Ts” is key to improving sign-up flows and increasing conversions. 2017-10-26
Granddad died today
Granddad died. The unspoken practice of death-by-dehydration in the NHS. The Liverpool Care Pathway. Assisted dying in the UK. The importance of planning in end-of-life care. 2017-05-19
How do I call a program in C, setting up standard pipes?
A C function to create a new process, set up its standard input/output/error pipes, and return a struct containing the process ID and pipe file descriptors. 2017-02-17
Your syntax highlighter is wrong
Syntax highlighters make value judgments about code. Most highlighters judge that comments are cruft, and try to hide them. Most diff viewers judge that code deletions are bad. 2014-05-11
This page copyright James Fisher 2018. Content is not associated with my employer. Found an error? Edit this page.