[staunch]

Companies like Facebook and Google are definitely not the last companies in their markets. Being in a monopoly position does not grant you magic protection from competitors. It probably even hurts more than it helps in the long term. Google and Facebook have not radically innovated since their inceptions. Google is still essentially a better AltaVista/Hotmail and Facebook is still essentially a better MySpace. And yet changes every day in the world make radically new approaches possible.

Zuckerberg did not pay $1 billion for Instagram and then $19 billion for WhatsApp because he wanted to. He did it because he believed they had a shot at replacing Facebook (and so did they).

Even Apple had to fight for its position with smart phones, which it practically invented. If Apple hadn't poured resources into keeping iPhone ahead of Android it would be absolutely dead today. Their monopoly began expiring the day it came into existence.

You either acquire and kill the competition or innovate and beat them in the market. Either way your monopoly doesn't protect you.

[csallen]

>> "It probably even hurts more than it helps in the long term."

Compared to what? Big companies and monopolies die eventually, yes, but they pretty much outlast smaller companies and startups by definition.

Being big gives you the power of scale. You can simply afford to spend more resources building moats around your business than your smaller competitors can. If someone built a better Google.com today, I'd still be checking my Gmail and using an Android phone daily, plus Google would be in a much better position to play catchup than AltaVista et al were.

[staunch]

Compared to not having a monopoly. Google has built up a massive empire using their monopoly profits to subsidize every new business they've built. They lose money to give away products and services that users wouldn't pay for. It's a house of cards resting on a single point of failure. It wouldn't survive laying off most of its staff, which it would have to if it lost its search revenue.

Companies that have always had to sing for their supper are much stronger. Apple is the best example. They constantly make new products that result in new sources of money.

[csallen]

Having one primary source of revenue vs having more than one is not the same thing as having a monopoly vs not having one. A monopoly is about the number of serious competitors you have, not the number of revenue steams you support or innovations you create.

To wit: there are companies with only one product without monopolies (e.g. pretty much every startup ever), and companies that constantly invent new products and do have monopolies (e.g. pharmaceutical companies).

[staunch]

Of course it doesn't mean having one source of income. But in practice it looks that way. Certainly that's been the problem at Google, Microsoft, IBM, Oracle, etc. These companies came to rely on market domination instead of technology innovation, because their monopoly positions allowed them to.

[increment_i]

>> "Google is still essentially a better AltaVista/Hotmail and Facebook is still essentially a better MySpace."

Not sure I agree here. There's much more to both companies than simply google.com the search engine and facebook.com the social network. Both firms have invested heavily in companies and technology that they feel will be leaders in future industries. And by 'future industries' I mean industries that are literally in their infancy right now but are poised for explosive growth in this century (robotics, aerial technology, virtual reality, artificial intelligence, etc). To tie into Thiel's thesis, they are likely preparing and planning to become monopolistic forces in these new fields as well, which is probably a very sound strategy.

[betadreamer]

I agree with your points. The biggest point is that they will be the last one standing in that market. After reading your comment I came to the conclusion that in the technology world you either dominate or be replaced.

[applecore]

Instagram was worth $1 billon to Facebook in April 2012. WhatsApp is worth $22 billion in cash and stock to Facebook in October 2014. A lot can change in two and a half years, including relative valuations.

[001sky]

The point is that they are worth x if not buying them out would lower FB stock by X. Thats a wholly distinct notion than the company (per-se) being worth X. People are overly fascinated by valuations tied to $$$ signs, and under-appreciate the negative (exclusionary) value of property. There is a huge value in keeping (inexpensive) assets out of the hands of those who could usurp your power.

[applecore]

It's clear in hindsight that Facebook was (rightly) focused on the enormous upside optionality of the Instagram acquisition.

It wasn't about paying $1 billion for downside protection.

The same is true for the WhatsApp acquisition.

[001sky]

This is, I think, absurd. And investment banker will tell you that eliminating your largest competitor just prior to an IPO will give you a material valuation premium delta. In other words, you are going to price up the company (or not take it down) +/- 5% or greater based on such an external event. Ergo, triggering the event to occur by allocating 1% of the IPO proceeds is basically and arbitrage trading strategy. It has everything to do with things other than the ability to monetize the revenue stream at time T+1. You don't need the (furture) monetization because the deal is already NPV positive as of the close of the order books.

The logic for whatsapp is also similar, if less coldly transactional. The what'sapp TEV is something like 10% of FB value today. Again, these are the orders of magnitude financial advisors will mark-up a valuation for eliminating a major competitive threat. The only assumption really for operation performance is zero NPV.

This reallu only works for companies acquiring strategic threats at still early valuations with paper/zero interest finacing (say, Google buying FB at $7B), tho.