Peter Thiel has said, “All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition… Competition is for losers. If you want to create and capture lasting value, look to build a monopoly.” The 4th M is about leveraging the moat to create a monopoly. This means becoming the only game in town. This can be done through a variety of methods, such as mergers and acquisitions, or simply by being so good at what you do that no one else can compete.
Once a company has a solid moat around its business, it’s poised to leverage it into a monopoly. This often involves outpacing competitors, continually innovating, and making strategic moves to corner the market. A perfect example is Google. Its dominant position in the search engine market is fortified by its unparalleled algorithm and vast amounts of data, representing a moat that competitors find hard to breach. By leveraging this moat, Google has effectively turned itself into a monopoly, controlling over 90% of the global search engine market share. [Google now is being challenged in search for the first time in two decades by Microsoft Bing with its OpenAI partnership.]
Mergers and acquisitions are another common strategy to create a monopoly. Disney, for instance, has used this strategy to great effect. By acquiring Pixar, Marvel, Lucasfilm, and 21st Century Fox, Disney has amassed an unparalleled portfolio of intellectual property that spans across many of the most beloved franchises in film and television. These acquisitions have made Disney a dominant player in the entertainment industry, essentially creating a monopoly in that space. This awesome chart by Cartoon Brew (from 2019) shows Disney’s dominance:
Simply being excellent at what you do can also lead to a monopoly. Apple’s relentless focus on design, innovation, and customer experience has allowed it to command a significant share of the premium smartphone market. Its ecosystem of interlocking products and services creates a powerful network effect that drives customer loyalty and discourages users from switching to competitors. Apple is now extending its dominance into fintech, as this chart from Flagship Advisory Partners (early 2023) shows.
Lastly, some companies turn their moats into monopolies by leveraging regulatory privileges or patents. Pharmaceutical companies, for instance, are granted exclusive rights to sell a new drug for a certain period. This monopoly is legally protected, ensuring that competitors cannot undercut them during that time. ChatGPT: “Lipitor, Pfizer’s cholesterol-lowering drug, became one of the best-selling pharmaceuticals of all time. Sales of the drug created a money machine, and patent protection formed a strong moat. For many years, Lipitor had a monopoly on its specific formulation.” Statista: “For around a decade cholesterol-lowering drug Lipitor was one of the company’s top blockbusters, with record-high revenues of approximately 13 billion dollars in 2006.”
A good playbook for creating moats and developing them into monopolies come from “7 Powers: The Foundations of Business Strategy” by Hamilton Helmer. The book presents a framework that centres around the concept of strategic “powers” that create and protect a business’s long-term economic value. I asked ChatGPT to summarise the seven powers:
- Counter Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
- Switching Costs: It’s expensive for customers to switch away from a product, which locks them into continuing to use it. This can be seen in software services where migrating to a new system would be costly and disruptive.
- Network Economies: These are the classic network effects, where the value of a product increases as more people use it. Social networks like Facebook and transaction platforms like Amazon Marketplace are examples.
- Scale Economies: These refer to the declining incremental costs associated with one more unit of output. Many manufacturing and software businesses benefit from these economies.
- Brand: This power arises when consumers trust a company and come back to it time and again. Brands like Coca-Cola and Apple have this power.
- Cornered Resource: This power arises when a business has exclusive access to a valuable resource. This could be intellectual property, talent, or physical resources.
- Process Power: This is the power gained through unique and superior methods of production or delivery that can’t be easily copied by competitors.
To summarise: the journey from magical product to money machine to moat and monopoly isn’t a linear or predictable one. It requires innovation, strategic planning, and a deep understanding of customers’ needs and wants. However, when done successfully, it can propel a company to unmatched success, exponential growth, and longevity. It’s a journey that not only changes the fortune of the company but can also redefine consumer expectations and reshape industries.