„If you’re starting a company, you always want to aim for monopoly. You always want to avoid competition. Competition is for losers” – Peter Thiel
The ongoing discussions about limiting the power of the biggest tech companies in both the US and Europe have brought one phenomenon back into focus: the emergence of monopolies and how to counter them.
First of all, monopolies are not bad per se. Basically, they are protected by the state, albeit on a small scale. This is done through patent law, which, to a certain extent, guarantees the rights and thus the monopoly for a certain product or method - for a limited period of time. In some areas, they are even essential, such as water supply, where the cost of establishing redundant, parallel pipelines exceeds the benefit. And don't you also like paying with Visa Credit Cards all around the world without the need for a separate card for each new location?
Despite these examples, when it comes to larger companies and their market power, the assessment of monopolies is also clear in science: they lead to inefficiencies and, once broken up, employment, productivity and competition increase in the affected sectors. Monopolies are also often perceived by the general public as something malicious and greedy. The first monopoly to be broken up in the USA was the Standard Oil Company. This was founded by John D. Rockefeller. It all started with a small refinery in Cleveland. Through agreements with the railroad companies that were needed to transport the oil, Rockefeller succeeded in undercutting other refineries and gradually pushed them out of the market or bought them up. By 1891, 90 percent of US kerosene exports came from Standard Oil Company and the company controlled 70 percent of the world market.
This example illustrates how monopolies are formed and why this is desirable from an entrepreneurial perspective. Most start with a small idea - a refinery in Cleveland or an online mail order business for books. A niche that initially needs to be mastered. Once this has been conquered, the company grows in concentric circles and gradually begins to take over other areas. Today, you can not only buy books from Amazon, but basically everything, as well as stream movies and music. The aim behind this is to secure as much of the value of a market as possible. This enables profitable business operations and primarily secures the future of the company as well as the support of investors who demand a return on their invested capital. If a dominant market position is exploited, productivity and competition suffer as a result, which in turn is also bad for consumers.
The complete opposite is a free market with many competitors without individual advantages. Classic examples are aviation and the music streaming market. In the latter, the offerings on all platforms, whether Apple Music or Spotify, are almost identical. The customer benefits from a broad offering and low prices, although Spotify as a company does not generate any profits. Netflix was in a similar situation around 10 years ago. The solution: in-house productions. As exclusive content, these in turn represent a monopoly. A niche within a market that is only open to Netflix customers. Thanks in part to these in-house productions, Netflix is 6x more valuable on the stock market than Spotify - with only 3x more revenue. The competitive advantage that companies have over other market participants is referred to as a moat. It is like a protective moat that prevents others from entering your own business castle. From an investor's point of view, companies such as Visa, Amazon, Amphenol and Linde are preferable to those with a small moat resulting in low margins and fluctuating revenues due to strong competitive pressure (e.g. Spotify, Lufthansa, Expedia, etc.).
Conclusion: Monopolies improve people's lives through innovative or cheaper products and often achieve their dominant position as a result of that. Once market power has been achieved, the declining competitive pressure leads to inefficiencies and diminishing innovative strength. Companies try to retain their market power by leveraging it, but as the cases of IBM and Xerox show, this does not necessarily succeed and can also be displaced by natural competition. But like a tree that grows too wildly, pruning can lead to new growth and greater fruit for all. In the case of the big tech companies like Meta (formerly Facebook), this might involve the splitting into separate companies each being subject to more competition again.
Incidentally: The breakup of Standard Oil Corp did not make John D. Rockefeller poor, as he had bought shares in the resulting companies after the breakup in 1911, which made him the first billionaire in history in 1916. These companies still include well-known firms such as BP, ExxonMobil and Shell, as well as Unilever, which has once again established a dominant position in local supermarkets, no longer with oil but with ice lollies, shower gels and ready meals.