Monopoly

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 making it durable.

Proprietary Technology

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 short page load times and highly accurate query autocompletion add to the core search product’s robustness and defensibility. It would be tough 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 ten 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 hard to sell, especially in an already crowded market.

The most precise 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 undoubtedly 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 ten 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 an obvious way: they offered at least ten 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 store any inventory physically—it merely requested the title from its supplier whenever a customer made an order. This quantum improvement was so useful that a depressed Barnes & Noble filed a lawsuit three days before Amazon’s IPO, claiming that Amazon was unfairly calling itself a “bookstore” when it was a “book broker.”

You can also make a 10x improvement through superior integrated design. Before 2010, tablet computing was so low that the market didn’t even exist for all practical purposes. “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 treasure, 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.

Network Effects

Network effects Intake a product Ignore 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 simultaneously, and that was never going to happen.

Paradoxically, then, network effects businesses must start with small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all Earth people. 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.

Economics of Scale

A monopoly business gets stronger as it gets more significant: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever more substantial 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 a large scale. Service businesses especially are challenging to make monopolies. 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 reasonably 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 can do.

A profitable startup should have the potential for grand scale built into its first design. Twitter already has more than 250 million users today. It doesn’t need to add too many customized features to acquire more, and there’s no inherent reason why it should ever stop growing.

Branding

A company has a monopoly on its 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 charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own.

Based on your industry, Twitter, Facebook, Instagram, and Pinterest may be worth analyzing for business promotion. Most small businesses that are just starting up would probably not have the budget to employ a full-time marketing person, but would nonetheless want to establish their online presence as soon as possible. So, they mostly find an online media consultant to help set up their Facebook page, Twitter account, website and so on.