Capturing value
- Create $X of value and capture Y% of X
Perfect competition
- Pro's: easy to model, efficient, "good for society"
- Con's: lowers profits
Monopoly
- People who have monopolies pretend not to have monopolies — claim to be a part of a much larger market
- Google claims to be an Global Ad company not a US search company
- People who operate in perfect competition claim to have monopolies to attract customers and investors
- The something of nowhere is the nothing of somewhere — Stanford of North Dakota
- Start with a small market and monopolize —> then expand the market (Amazon starting with books)
- Go after markets that other people think are too small to ever have any value — establish a foothold here then grow
- People boast about having large TAM's, this means they have a lot of competition — i.e. restaurant industry
Characteristics of monopolies
- You want to have a technology that is an order of magnitude better than the second best on some dimension — i.e. could process checks in 2 days vs the existing 10 days
- Economies of scale — marginal cost is extremely low —> scale quickly
- Network effects — becomes more valuable as user-base grows, monopoly grows over time
- Be the last mover —> have a monopoly that lasts, no one tries to compete with you at a certain point
- 80% of the enterprise value comes from the terminal value many years down the road —> the most important aspect is durability, making sure the company still exists down the road
- Lots of innovation in a space isn't good, it means you will become obsolete in the near future — you must be the last innovation for a while or be able to keep up with market innovation trends
- The person who flies the first plan is rarely the one who makes the most money — Wright brothers made no money — their Y was 0