Twitter has been middling, nay declining, on all fronts, but what is the song beneath the words with respect to the deal. Twitter’s revenues, profitability, opaque often mindless censorship, shareholder value and brand value have been broadly at a standstill for a while now. When it decided to become the self-appointed saviour and apostle of free speech, and a bunch of executives prominently Vijaya Gadde decided to de-platform POTUS, and peddled blatant lies to justify the Hunter Biden laptop, it was clear their own end was near. No group of individuals, no matter how powerful they are as shareholders or executives, can decide to shut down a democratically elected leader, no matter how gross he sounds to them. Period. Now with a lame duck CEO in Parag Agrawal, who will walk away with a handsome severance package if the deal goes through, Elon’s options are becoming fewer to pick from.
Musk is outside the normal curve of brilliance (and maverick-ness), indeed to the extreme right of it and is super driven to solve the hardest problems in the world and make lots of money, both at once. He doesn’t do anything without reason and people who are close to him, or have reported to him in the past, confirm the same. He first forced Twitter to swallow the ‘poison-pill” for they had no other option! What he is doing with Twitter is a beautifully choreographed drama to take Twitter private (and take it back public again), and yes, he will renegotiate the $54 price tag for that’s as expected putting pressure on not just his own personal finances, but also on the Tesla stock. He is merely doing what several prominent Indian promoters have been doing for decades and taking investors right up the garden path - a signed contract is only the next point to begin negotiation- almost immediately after signing- and not sacrosanct unless heavens fall.
Musk is showing the enormous superpower of private capital by taking Twitter private outside the prying eyes of public investors, and he will mold it, probably in his own image, perhaps break up the company into two parts, and take it public again to make lots of money for himself and the super-rich Silicon Valley crowd backing him. Only Elon has the ‘convening power” to bring together a Saudi prince who just a few days ago stood up against him, crypto kings, traditional venture capital and private equity funds, and FOEs (Friends of Elon). Who knows, he may run for the most powerful office in the world in another decade!
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In the coming weeks Elon will almost certainly renegotiate, reprice, and get himself a much better price, using the spam bots or the recent Justice Department actions on Twitter and anything else you can think of as levers to bring the price down closer to about $50. The law allows for a ‘material adverse effect” to renege on a deal and Elon could well ‘manufacture” it should he decide not to proceed. It is also highly unlikely the company can force Elon to complete the deal invoking the “specific performance” clause for that works rarely if at all, and they don’t want to battle Elon in the courts.
He could also still ditch the deal like he did in the past when he challenged Warren Buffett’s See’s Candies and save face with some excuse, or he may just lose interest in it, and this appears to be the most likely outcome. With the margin loans Tesla’s stock price has slumped by 25 per cent which he can ill-afford, the chances are he will go for a convertible note/debt, which is likely to come at 14 per cent per year interest rate, and a 20-year maturity! With that kind of cost of capital, he cannot but have to focus on the economics, despite his claims of not doing so. So free cash flows will become even more important now than ever before. With such economics, I am certain his chances of moving ahead with the deal are about as much as his chances of ditching it- we are at about the tipping point, and it can go either way now.
Elon’s Twitter pitch deck is otherwise extremely exhilarating. One of the two banes of social media has been its dangerous ability to tie human attention to advertising and convert people into commodities on which huge sums of money are made by investors. The pitch deck hopes to bring down ad revenues from 90 per cent to under half in 5 years while taking overall revenues up 5X to $26 billion by 2028. He hopes to do so via several ways, including increasing its ARPU from the current $24 to $30 and increase the user base to almost a 1 billion a near 5X increase from today. There is a mystery X service which also will add to the revenues, but no one knows what this is. It is also likely that he will GitHub Twitter so that it becomes open source and gets constant feedback from users on how to improve its performance and value, adding to his promise of a truly free town square in every respect.
This apart he hopes to start a $3 per month premium service, which will allow customisations and curated content. The real value for the customers of Blue would come if Twitter can share some of the ARPU with them. This would blunt the valid stinging criticism that humans are used as fodder to make billions via ad revenue. Even a small 15 per cent share to the user whose data is used, would be a genuine breakthrough in the social media business model and can spark a quiet revolution. At some point in the future, when crypto becomes more acceptable (and stable) Elon can even pay this via tokens creating his own currency.
In essence, Twitter is a bunch of micro services tied together, and what Elon will probably do is to unbundle them into two companies, one which is the core microservice with the much loved and used social graph and the other which becomes the advertising business. The first one should open its APIs (application programming interface) to those who want to contract it for a fee, thereby significantly increasing the reach of Twitter and will get it fee revenue. They should also be allowed monetisation in any way they deem appropriate.
However, there remain other contradictions which he needs to resolve. Consider the following: He has spoken eloquently about preserving Twitter as the public square of free speech, but it’s unclear how interpretations of free speech by democratically elected governments versus that of his own (and FOEs), will play out during endgame. If he tries explaining free speech, in the way he understands it, to say the semi-literate Circle inspector of Patiala, he may just find a lookout notice against him if he tries to enter India! Almost certainly at a time when he’s facing a huge resource crunch for his Giga factories, if he tries espousing the merits of free speech of the Uyghurs to President Xi, it is unlikely that it will go down well for Tesla- and it may, in-turn accelerate their India entry. In fact, it is well within the realm of conception that China might use Tesla as leverage to make Elon Musk moderate anti-China content on Twitter. At a time when Tesla’s manufacturing negotiations with the Indian government hasn’t made much headway he would be left with a tough choice if he takes on the Chinese purely on account of his fantasies to protect free speech.
Content moderation, in a world awash with strongmen, nationalists and dictators is an extremely difficult game to play even during good times, something Elon has probably not factored in fully yet.
As the number of listed companies around the world continue to decline, thanks to be super power of private capital, efforts such as that of Elon and FOEs is almost certainly going to shrink the retail investors participation in stock markets, thereby slowing down wealth creation reaching them. This is perhaps the biggest unintended negative externality of the enormous tsunami of private capital awash in the world today, which among other things is propelling Indian entrepreneur than startups, both genuine and fake.
How Musk’s stated intent of creating the world’s freest public square (and not make money off it- this part is probably just theatrics and needs to be taken with a bag of salt) squares off against the commercial realities (with pressure building on the Tesla stock and his own wealth) of blitzscaling a near flat organisation with significant baggage, and creating enough free cash flows to pay off the $13 billion debt and counting, that he plans to raise, and how his proposed payments service will compete against established Goliaths like Stripe, PayPal and various consumer facing apps constitute one of the most challenging business contests of our times. (His latest financing figures show the debt figures to be lower, which means he must find more equity from somewhere but where?).
In sum, while Musk seems good for Twitter, is Twitter good for Musk or is the flirting going to end soon?
Views are personal. Author is an IAS officer. His Twitter handle is: @srivatsakrishna
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