Monopolies are terrible. We have longstanding negativity towards monopolies dating back to the earliest memories of economics class. Monopolies are evil. Right now in South Africa we need no reminding of the inefficiency of monopolies resulting from lack of competition when experiencing Eskom unravel into a seemingly endless cycle of load shedding. This month we were also victim to the monopolistic tendencies and associated market power of the cell phone companies when they unilaterally increased the pricing of two year contracts mid-stream! We even have the Competition Commission acting as our steward to ensure that we are not at the wrong end of anti-competitive practice. Surely monopolies are to be avoided?
Not so fast. Firstly the opposite of monopoly is perfect competition. And while the notion of perfect competition has long been considered the ideal, the only challenge to this, as pointed out by Peter Thiel, co-founder of PayPal, in his book Zero to One, is that under these conditions in the long run no company makes a profit! So we need a bit of more nuance in our understanding
Secondly not all monopolies are created equal. Certain types of monopolies must continue to be avoided and legislated against – those that secure their monopoly by means of illegal behaviour or government protection. But there is another type of monopoly that creates its market power by being so good at what it does that no other firm can offer a close substitute. (think Google and search) These are known as creative monopolies and they are defined by Thiel as: “giving customers more choices by adding entirely new categories to the world.” In these ways monopolies are far more central to entrepreneurial endeavor than we might have initially expected.
If we are struggling to get our heads around this paradigm of embracing monopolies, it is worth considering that the global system of patents essentially facilitates the establishment of creative monopolies. Further these monopolies are often the mechanism for achieving progress through the replacement of incumbents (think Whatsapp replacing SMS). Interestingly Thiel goes on to say that companies earn a monopoly by solving a unique problem, which serves to reinforce the argument that purpose driven businesses are essential for significant and sustainable success.
So where do we discover these creative monopolies? The simple answer is in the blue ocean. Last year in listing the 10 books that had most influenced the Foundation’s journey, we referenced “Blue Ocean Strategy”, which describes a powerful framework for evaluating new opportunities. The purpose of Blue Ocean Strategy is not to out-perform the competition in an existing industry, but to create new market space or a “blue ocean” thereby making the competition irrelevant. Exactly fitting the description of a creative monopoly!
This pursuit of Blue Ocean is becoming increasingly important for our economic future. In a discussion with a respected, retired South African business professor, he expressed frustration as to how most of South African business was caught up in the fierce competition and increasing efficiencies of Red Ocean rather than looking for game changing opportunities in the open space of Blue Ocean. It seems clear that the levels of growth required in the years to come will not come from the Red Ocean. We need to widen our horizon to that of the Blue Ocean. As Thiel observes: “Today our challenge is to both imagine and create the new and better ways of doing things that can make the 21st century more peaceful and prosperous than the 20th.” Not an outcome we can take for granted. A good start would be find new and better ways of producing reliable electricity, oh and of course Whatsapp mobile calls!
Listen to Michael Jordaan’s radio interview about Peter Thiel’s book “Zero to One” here.