Featured Post

Peter Thiel’s Idea of Monopoly Using Howard Stern as an Example.

I think a subtitle to this post could be “Policing Your Monopoly.”

So in my last post I noted Peter Thiel has ideas worth valuing (indeed, if you can, investing in). In his latest book, Zero to One, Thiel notes companies should seek to be “monopolies.” That’s a complicated term. Though he might not put it this way, he means “de facto” as opposed to “de jure” monopolies.

On the one hand, if you are a de jure monopoly then you (arguably) violate American and international antitrust law. On the other, you could get a legal monopoly in the form of intellectual property. Thiel is talking about something slightly different: Position your product, service, what have you, as though you are the only game in town. Think Facebook for social media, Google for search, YouTube for videos, and Amazon for E-commerce. Of course in a free market, where borders to entry are open, others can compete. But who else are you going to go to?

Maybe one day something will do to Facebook what they did to Myspace, what VHS did to Beta. Who knows where Apple will be 10 years from now? Such is the nature of capitalism.

But whatever legal monopolies companies possess with patents and copyrights, they can shrewdly “police” their turf with strategy.

So take Howard Stern for instance. I’ve long been a fan, from when I had an uneducated and unrefined mind. Now that I have an educated and refined mind, looking back, it surprises how his success lasted and how much $ he’s made. But there is a rational explanation: He has real talent, in more ways than one.

We think of him as a virtuoso “shock jock.” He’s also an extremely shrewd businessman (and a master interviewer to boot). He and his employers possess legal monopolies in the form of the copyright to his show’s content. The Supreme Court of the United States in a controversial decision said “business methods” are patentable processes but then backed off somewhat, recognizing the disturbingly anti-competitive implications of such.

Stern, from what I know, never “patented” his business method. But he policies his “act” as though it were a monopoly. He also, when entering any market, sought a monopoly by putting his competition out of business. Indeed, he ruthlessly put many of them down (Stern never got in trouble under American antitrust law, but perhaps could have).

And what happens when a new idea seems hot? Unless one has a legal monopoly from intellectual property rights, attracted competitors will model you and seek market share. As the Chicago School was fond of noting, natural monopolies attract competition such that if barriers to entry remain open, the problem tends to resolve itself.

For instance, I love The Beatles, Stones, Led Zeppelin, The Who, etc. They were innovators. And of course they had influences (among others, notably prior black American blues artists). But those Brits still managed to package themselves into something unique and innovative for the time. Once hot, bands imitating them exploded, the vast majority forgotten.

Howard Stern too, though he might not admit it, had influences (I won’t name his non-radio influences; but his radio influences include Bob Grant and Steve Dahl (and yes, disco did suck, IMO)). But Stern was not simply a “repackaging” of Grant meets Dahl. There was something trans-formative in a like way that the aforementioned British Invaders transformed their earlier influences.

So how did Stern react to those he influenced who came after him? He was as ruthless with them as with the jocks whose markets he conquered. He acted as though, that his new competitors imitated his proven business model somehow rendered them inauthentic and not worth listening to. But they had every legal right to be influenced by him and so compete.

That is, he didn’t have a legal monopoly (like a copyright or patent), but he attempted to police his de facto monopoly.

So compelling was Stern’s positioning that I was convinced. It took me years to recognize some of his younger competitors he influenced were also worth listening to because of their talent. (Stern’s line is “they are doing ‘my act.'” In a sense true, but they had every right to so compete.)

Back to our music analogy. Most imitators of The Beatles, Led Zeppelin, etc., weren’t worth listening to; they were like pale carbon copies. But some were good. Groups like Squeeze and Badfinger could sound like The Beatles while delivering solid music. But yeah, not as good as The Beatles.

Sometimes an imitator can beat the originator at their own game. Jimi Hendrix? Who could do him? Not many. But Stevie Ray Vaughn perhaps. What about Ray Charles? Richard Manuel. When an imitator “covers” an originator, the originator (or those shrewd business folks who own the publishing to the copyright) get paid. That’s the power of legal monopoly. Indeed, even if some of the licks, riffs and melodies sound too “substantially similar,” copyright can force the imitator to pay.

But if IP or the like doesn’t apply, the originator deals with the often brutal realities of competition. The younger, meaner, leaner competitor can kill you. The vast majority of Stern’s competitors influenced by him (“doing his act”) failed. But some were good. Opie and Anthony, for instance, lasted because they had talent. When pressed, they admit he strongly influenced them.

Did Stern ever have a nice word to say about them? Not while they were up and coming. The closest to a “nice word” was when O&A were unknown newbies and Anthony entered a contest on Howard’s show (Stern having no clue who either of them were). Stern was genuinely entertained by Cumia because Anthony was good. So good Cumia, IMO, could have been part of Stern’s crew (replacing perhaps Billy West) if he didn’t try to make a name for himself.

But when O&A started to rise, Stern was brutal with them as with everyone else, attempting to constrain them, policing his monopoly. Stern criticized them; they would fight back. They knew him too well. Stern’s past defeated competition were encouraged to “take the high road” and not respond while he proceeded to destroy them. Stern made, O&A knew, Philadelphia’s “Zookeeper” John Debella look like a “shithead,” with JD attempting to win the battle by ignoring Stern (which didn’t work).

As they progressed, O&A ended up working at the same station as Stern for a while. Stern got management to enforce a “gag order” where he could criticize them but they couldn’t respond. He did this by strategic manipulation of management, using his vast negotiating bargaining power. All legal of course. Stern admitted to Sean Hannity he did this.

His defense? Paraphrasing: These guys are doing “my act.” His act. His turf. His monopoly he policed.

Feature Image: “US Deluxe Monopoly Tokens” by ScooterSES at English Wikipedia – Transferred from en.wikipedia to Commons.. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:US_Deluxe_Monopoly_Tokens.jpg#/media/File:US_Deluxe_Monopoly_Tokens.jpg


Staff Writer
Home Page 

Jon Rowe is a full Professor of Business at Mercer County Community College, where he teaches business, law, and legal issues relating to politics. Of course, his views do not necessarily represent those of his employer. ...more →

Please do be so kind as to share this post.
TwitterFacebookRedditEmailPrintFriendlyMore options

16 thoughts on “Peter Thiel’s Idea of Monopoly Using Howard Stern as an Example.

  1. Pingback: Howard Allen Stern News

  2. As the Chicago School was fond of noting, natural monopolies attract competition such that if barriers to entry remain open, the problem tends to resolve itself.

    I had thought natural monopolies were by definition less likely to attract effective competition. Does the Chicago School say differently? (The Bork wikipedia article doesn’t seem to address the issue.)

    Report

    • Any smart monopoly (Defined as: We set our prices at whatever price point we damn well feel like — “what the market will bear” rather than competitive with other providers) will allow enough small bit players into the marketplace so they can’t get sued, while keeping enough market share and ideaspace to aggressively fight off any of the small bit players getting big enough to actually cut into profits.

      Report

  3. I think there are a lot of factors (well a really big one called racism) that kept that Black blues musicians from getting as famous as the Stones. There is a long history from jazz onwards (if not before) of white musicians taking black music and making it “safe” for white audiences. There was a guy in the 1920s who created what he called “sweet jazz” that was the really popular stuff played on radio. He took jazz and basically defanged it. There were popular black jazz musicians like Louis Armstrong or Duke Ellington but I think a lot of the black jazz musicians did not respect many of their white counterparts with the possible exception of Bix Beiderbecke. It took until people like Benny Goodman, Buddy Rich and Artie Shaw for there to be more seriously respected white jazz musicians.

    The early blues musicians were just called “race music” and they were probably too raw and real for much of America at the time. Though you and might really like this book:

    http://www.amazon.com/Not-Sell-Any-Price-Obsessive/dp/145166706X

    Report

    • This runs contrary to the Elijah Wald theory and argument that there was a lot more mixing in people’s taste in music. Wald would point out that the white musicians who brought jazz to the general audience of White America did actually listen to what African-American artists did and were influenced by it but took it in their own direction. Wald would also point out that plenty of African-Americans purchased and listened to “sweet jazz” for their own listening pleasure. Wald will also argue that African-American musicians were influenced by White jazz musicians.

      The central thesis of Wald is that a lot of popular music history is really the critics projecting their opinions, taste, and ideas back in time rather than an actual history of what the American people were listening to at any given time. For instance, Wald produced a lot of evidence that the blues artist Robert Johnston was not very popular even in hardcore blues audiences during his life and a lot of his fame was from critics making him more important than he actually was after he died. To Wald, what critics were looking for in music was stuff that required active listening rather than music you could dance or sing to. Most people of all races just wanted music that could be danced or sung to before the 1960s. That was the primary criteria for what constituted good music.

      Report

      • Robert Johnson, not Robert Johnston. Bellow is a link that provides a good summary of Wald’s thesis:

        http://www.nytimes.com/2009/07/12/books/review/Keepnews-t.html?_r=0

        What Wald would point out is that even though music critics would give Paul Whiteman the short shift today, he was very popular and influential during the 1920s and 1930s among both White and Black audiences and musicians like Duke Ellington. Wald would also point out that the standard theory of 1950s pop music is wrong, plenty of teenagers listened to both Perry Como and Jerry Lee Lewis.

        Report

  4. Was Stern’s main aim to protect his brand, or was picking fights with other people merely a way to enhance his brand? (see also, Donald Trump. Or any given rap feud).

    Report

    • If Stern’s biopic is to be believed, I don’t think the attacks were an important part of his brand. But I’m not really an expert. Regardless, I think that Rowe’s points here still stand as part of protecting a monopoly is creating and defining a product that people want.

      From my vantage point, my general mindset is that I don’t object to the sort of monopolies described here. If you make the best pizza in town and everyone comes to you and avoids your competitors, well, so be it. Where I start to get twitchy is when folks attempt to use what I’ll call unnatural forces to protect their monopolies, especially if they invoke government power. I do believe in IP but if the best pizza joint in town tried to make it illegal to open other pizza joints… or sought “regulation” of the industry such that it created unnecessary barriers to entry, I’d strenuously object.

      Stern’s appeal to management feels a little unseemly but I don’t see a way to prevent it. And its impact is limited as it doesn’t apply to competitors under different management.

      All that said, I do have some discomfort because certain companies that possess these sorts of monopolies came to hold them in very problematic contexts. I’d venture to guess that the vast majority of such monopolies are held by white males because of structures — formal and informal — that privileged white males to the detriment of women and people of colors (and other groups). I’m not sure how we correct for that but it is troubling.

      This is where I enter my “Yea, I support a largely libertarian, free market approach IFF we can correct for all the legacies of very restricted markets under which our current system exists AKA blow it up and start from scratch but we can’t so we need to regulate the market somehow but don’t ask me how to do it” part of my philosophy.

      Report

  5. This is interesting, since a long time ago, back when I knew even less about economics and business, it seemed trivially obvious to me that eliminating competition was sorta logically entailed by profit motive. If only I’d written about that a long time ago and monopolized the “become a monopoly” market way back when. I’d be rich!!

    Report

  6. I’m going to be the morning grouch and say that I think this post is sloppy.

    The difference between de jure and de facto monopolies is the difference between state power and a better product. The differences so outweigh the similarities that the same word should not be used to describe both.

    What barriers to entry exist for a radio personality? Actually, probably quite a few. There is only so much spectrum and opening a new station requires a FCC license. So Rush and Howard probably have quite a bit of power to keep competitors off the air by demanding that any station that carries them not carry a competitive voice.

    But a browser, or a search engine? The only thing that keeps Firefox from going the way of Netscape is product quality (plus user fatigue / ignorance).

    And natural monopolies are not correctly described. (FWIW, the word ‘natural’ is not to be found in the linked article.) Natural monopolies are things like retail municipal water service, where the most efficient production is in a single distributor. (The manufacture of low-volume pharmaceuticals may also be another natural monopoly.)

    Sure, you should try to become a monopoly. Down that road lies inefficient profits. But it’s very odd for a libertarian to be advocating for that goal. If the word ‘monopoly’ is going to continue to have useful meaning, it needs to be something more than ‘better’, and for most people that means some measure of state support and/or protection. Which, last I checked, was anathema to libertarians like Thiel.

    Report

    • I didn’t use the term “natural monopoly” as is used in economic jargon but rather as a plain speaker might. As in, I offer a product or service that naturally monopolizes market, as in it just “naturally” happened that I’m now the only game in town. The Wiki article on Bork’s Antitrust Paradox could be better written. While his book argues many things, its main point is if a firm has a monopoly, the circumstance will naturally resolve without the need of government intervention. That is, provided barriers to entry remain open a leaner meaner competitor will come and take market share.

      Thiel’s point is capitalism and competition are not synonymous because if there is perfect competition the profits evaporate. And he uses the term “monopoly” to describe what ventures should seek.

      Report

      • Extending my morning grouchiness into the afternoon…

        It’s really not the end of the world to admit that you weren’t clear and used sloppy language. But digging in your heels about a hypothetical plain speaker’s use of the term natural monopoly is just silly. How many plain speakers ever talk about natural monopolies? To whom are they talking? Is this plain speaker trying to clarify the complex topic of monopolies or create confusion?

        Of course, many monopolies don’t resolve themselves without govt intervention. Water and power companies are regulated by state utility commissions because there is no market for a second provider. Trusts can wield such immense political power that they can prevent competition from ever gaining a foothold. “provided barriers to entry remain open” is such a large exception as to swallow the rule.

        Another point: If Bork is correct then Thiel is wrong. Per Bork, the moment that a company becomes a monopolist and a price-setter, competition will naturally (to use your word choice) come in to drive down the price to competitive levels. If, however, Thiel is correct that monopolies exist and should be sought, then he has just justified the need for an activist government to regulate and root out the market failures which allow monopolists to acquire excess profits.

        And a final point: this claim — ” if there is perfect competition the profits evaporate” is just wrong, or is using economic jargon. (which is precisely your complaint about my comment.) My class in Econ 101 was over 30 years ago, but I still remember that competition eliminates excess profits, not all profits. Just look at the real world! There is enormous competition in the restaurant industry, and yet people still invest in restaurants. The risk-adjusted return on capital may be very low, but it is still non-zero or people would just leave their money in T-bills.

        “Police your monopoly” does not equal “say nasty things about one’s competition”. That is abusing language to the point of creating confusion, not clarity.

        Report

  7. A couple of thoughts: first, business don’t compete in “the market”, they compete in industries in “the marketplace”. Facebook or Apple can create barriers to entry and dramatic economies of scale by the nature of the industries they compete in; a restaurant is constrained by limited barriers to entry, geographic limitations in terms of customer access and product perishability, and intense and necessarily local labor costs.

    On the “market equilibrium where there is no profit” idea. Hypothetically, an industry with pure open competition will drive the costs of production down to the point where there is a $.01 profit per transaction (or even a fraction of a cent profit, if you want to go there). At the point where there is no profit, competitors will drop out and use the capital (resources) to do something else in a different industry. If the industry still can’t make a profit with fewer competitors, producers will leave to do something else and the industry will disappear (see buggy whips).

    Where does the capital go? That’s where the consumer preference signalling comes in. You can make the point that with “big things that change the world” like a Facebook, consumer preference signalling is more of a yes/no decision, and if yes you can take over an industry due to high barriers to entry. Daily consumer preference signalling is very applicable for restaurants, grocery stores, apparel and a whole host of other industries providing products that meet consumer’s more immediate needs.

    An anecdote about sweeping generalizations. I was working with a world famous professor of competition on inner city business development. We were discussing industries and how you want to place your bets on companies outperforming their industry growth. I raised the point that if you keep outperforming the industry and growing, at some point you are so large that your growth rate is in fact the industry growth rate. I was looked at blankly. Realistically, this won’t happen in most markets. But it does highlight the point that investment and resources will go where there is a profit to be made relative to other competitors in that industry, so the “be a monopoly” mantra is not particularly useful for most business owners.

    Report

Comments are closed.