What does a company with large cash flow far into the future look like?
Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.
This isn’t a list of boxes to check as you build your business—there’s no shortcut to monopoly.
However, analyzing your business according to these characteristics can help you think about how to
make it durable.
1. Technology Ownership
Proprietary technology is the most substantive advantage a company can have because it makes your
product difficult or impossible to replicate.
Google’s search algorithms, for example, return results better than anyone else’s. Proprietary technologies for extremely short page load times and highly accurate query autocompletion add to the core search product’s robustness and defensibility.
It would be very hard for anyone to do to Google what Google did to all the other search engine companies in the early 2000s.
As a good rule of thumb, proprietary technology must be at least 10 times better than its closest
substitute in some important dimension to lead to a real monopolistic advantage.
Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.
The clearest way to make a 10x improvement is to invent something completely new. If you build
something valuable where there was nothing before, the increase in value is theoretically infinite.
A drug to safely eliminate the need for sleep, or a cure for baldness, for example, would certainly
support a monopoly business.
Or
you can radically improve an existing solution: once you’re 10x better, you escape competition.
PayPal, for instance, made buying and selling on eBay at least 10 times better. Instead of mailing a
check that would take 7 to 10 days to arrive, PayPal let buyers pay as soon as an auction ended.
Sellers received their proceeds right away, and unlike with a check, they knew the funds were good.
Amazon made its first 10x improvement in a particularly visible way: they offered at least 10 times
as many books as any other bookstore.
When it launched in 1995, Amazon could claim to be “Earth’s largest bookstore” because, unlike a retail bookstore that might stock 100,000 books, Amazon didn’t need to physically store any inventory—it simply requested the title from its supplier whenever a customer made an order.
You can also make a 10x improvement through superior integrated design. Before 2010, tablet
computing was so poor that for all practical purposes the market didn’t even exist.
“Microsoft Windows XP Tablet PC Edition” products first shipped in 2002, and Nokia released its own “Internet Tablet” in 2005, but they were a pain to use.
Then Apple released the iPad. Design improvements are hard to measure, but it seems clear that Apple improved on anything that had come before by at least an order of magnitude: tablets went from unusable to useful.
2. Network Effects
Network effects make a product more useful as more people use it.
For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. Unilaterally choosing a different social network would only make you an eccentric.
Network effects can be powerful, but you’ll never reap them unless your product is valuable to its
very first users when the network is necessarily small.
For example, in 1960 a quixotic company called Xanadu set out to build a two-way communication network between all computers—a sort of early, synchronous version of the World Wide Web.
After more than three decades of futile effort, Xanadu folded just as the web was becoming commonplace. Their technology probably would have worked at scale, but it could have worked only at scale: it required every computer to join the network at the same time, and that was never going to happen.
Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses
rarely get started by MBA types: the initial markets are so small that they often don’t even appear to
be business opportunities at all.
3. HES (High Economies of Scale)
A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
Many businesses gain only limited advantages as they grow to large scale. Service businesses
especially are difficult to make monopolies.
For example If you own a yoga studio, for example, you’ll only be able to serve a certain number of customers. You can hire more instructors and expand to more locations, but your margins will remain fairly low and you’ll never reach a point where a core group of talented people can provide something of value to millions of separate clients, as software engineers are able to do.
A good startup should have the potential for great scale built into its first design.
Combination of above 3 can put your company on big track but this article will remain uncomplete without adding another important point called Branding
4. Branding
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful
way to claim a monopoly.
Today’s strongest tech brand is Apple: the attractive looks and carefully chosen materials of products like the iPhone and MacBook, the Apple Stores’ sleek minimalist design and close control over the consumer experience, the omnipresent advertising campaigns, the price positioning as a maker of premium goods, and the lingering nimbus of Steve Jobs’s personal charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own.
Many have tried to learn from Apple’s success: paid advertising, branded stores, luxurious
materials, playful keynote speeches, high prices, and even minimalist design are all susceptible to
imitation.
But these techniques for polishing the surface don’t work without a strong underlying
substance.
Apple has a complex suite of proprietary technologies, both in hardware (like superior
touchscreen materials) and software (like touchscreen interfaces purpose-designed for specific
materials).
It manufactures products at a scale large enough to dominate pricing for the materials it
buys. And it enjoys strong network effects from its content ecosystem: thousands of developers write
software for Apple devices because that’s where hundreds of millions of users are, and those users
stay on the platform because it’s where the apps are.
These other monopolistic advantages are less obvious than Apple’s sparkling brand, but they are the fundamentals that let the branding effectively reinforce Apple’s monopoly.
Beginning with brand rather than substance is dangerous.
When Marissa Mayer became CEO of Yahoo! in mid-2012, she has worked to revive the once-popular internet giant by making it cool again.
In a single tweet, Yahoo! summarized Mayer’s plan as a chain reaction of “people than
products then traffic then revenue.”
The people are supposed to come for the coolness: Yahoo! demonstrated design awareness by overhauling its logo, it asserted youthful relevance by acquiring hot startups like Tumblr, and it has gained media attention.
But the big question is what products Yahoo! will actually create. When Steve Jobs returned to Apple, he didn’t just make Apple a cool place to work; he slashed product lines to focus on the handful of opportunities for 10x improvements.
No company can be built on branding alone. So combined efforts such as technology, network effect, HES and Brand can push any company to uniqueness.
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