New Message from Elon Musk (real)

The midterms are officially hotter than that VP who won’t stop reminding you they ran the NY Marathon in this weather. We off-boarded election coverage to people qualified* to talk politics. So today we’re left with market news, Twitter, ESG and whales hedging political correctness.

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• Theranos founder Elizabeth Holmes’s request for a new trial is over after a federal judge ruled that a whistle-blower witness testified truthfully a year ago.

• A US District Court ruled in favor of the SEC yesterday in its case against blockchain-based file-sharing and payment network LBRY. In other words, the court ruled LBRY’s token is a security.

• Tesla recalled more than 40,000 cars over a possible loss of power steering. It’s the level of execution you’d expect from Musk's first company Zip2 - the last time he actually wrote any code. Word has it he wrote so much code that he needed to bring in CS grads who then removed all of it and replaced it with "just a fraction of lines of code" before they could launch.

* Let your definition of that guide you where it may.

But first, a quick note from The Information.

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Deep Dive: New Message from Elon Musk (not parody)

Allegations are surfacing that an oligarch is now at the helm of Twitter. Let’s recap.

Billionaire Elon Musk took over Twitter less than a month ago. He wasted no time laying off a substantial chunk of its workforce, promising a number of major changes to the platform. One of the most controversial changes on the horizon regards Twitter’s terms of service (“TOS”).

Following Musk’s acquisition, a wave of regular and high-profile users changed their Twitter display names to "Elon Musk." Kathy Griffin was the last straw.

Griffin’s account was banned on Sunday. The same day, Musk announced that all impersonators would be permanently suspended from the platform unless they labeled their accounts as parodies.

Some Twitter users, including notable Conservatives, asserted this was not unusual practice. Even before it was bought by our nation’s most rational human, Twitter had a rule against impersonating other users.

Musk, now also the most proactive complaint support associate ever, was quick to fire back. He pointed out the key difference moving forward is not in Twitter’s terms of service – he alleges – but rather how the terms will be applied on the platform moving forward.

During Musk’s telenovela of a takeover, many of the same criticisms arose. Is he trying to innovate burning money? Why does he even want Twitter, and what for? Finally, is Musk winging it, or does he have a strategy? Let’s dive into the latter.

Departure from Dorsey’s profit-driven strategy

When Twitter first became profitable, the key to its success was due, in part, to an increase in daily active users, as well as an increase in advertising revenue. Revenue was further boosted by lucrative partnerships between Twitter and brands broadcasting live videos from events.

The quarter it broke even, then-CEO Jack Dorsey vowed to invest the profits into efforts to improve the “quality of information” on Twitter. Those efforts included removing malicious content, spam, fake accounts and making it easier to verify users.

Musk has long said that his interest in buying Twitter was to align its content moderation policy to only restrict speech to the degree that it is restricted by the First Amendment. Many Twitter users perceive this as a desire from Musk to do less content moderation. This may already be happening, since he took over and cut off content moderators from the dashboard they need to access to restrict banned content.

A surge in malicious content on Musk-owned Twitter has hit in the past week, flooding the platform with the very content that Dorsey considered bad for profits in the long-term. The recent surge in what some deem as “hate” content already has advertisers concerned and pausing ad buys. Twitter revenue is plunging at a time when Musk seems to be flailing to get numbers to go the other direction.

Now, advertisers will have to also consider what will happen when Twitter Blue launches next week. Internal Twitter documents reportedly show that “subscribers would not need their identities authenticated to get the check mark.” Politicians, journalists and members of the general public are concerned by its timing. It was originally slated to launch yesterday, with Musk now delaying its launch until after the midterms. Adversaries to the launch asserted that the new verification system would potentially make it harder to verify information shared about elections if fake accounts with blue checks are spreading misinformation.

Meticulous or madness

“We wanted flying cars. Instead, we got 140 characters,” Peter Thiel, PayPal co-founder and venture capitalist, famously quipped about Twitter in 2013. Musk has generally cast himself as more of a flying car guy. So what does he want with Twitter?

Over the last decade, the technological landscape has changed, and how and when to moderate speech has become a critical problem — and an existential problem for social media companies. In other words, moderating speech has looked more and more like the kind of big, complex strategic problem that captures Musk’s interest.

Yet it’s also a different kind of problem. There is little evidence that the experience curve effects apply here. YouTube was founded 17 years ago. Reddit 16 years ago. Facebook employs more content reviewers than there are people working for SpaceX. These companies alone have poured money and time in an attempt to solve the content moderation problem. And while interest in Twitter jobs jumped more than 250% after Musk’s announcement, Musk has no track record of organizational change. He didn’t build Twitter, and the organization today doesn’t have the extreme work culture of his other companies.

What is clear is that Musk’s capacity to mobilize resources remains strong. He made a substantial personal investment in Twitter — about 10% of his net worth — reinforcing that he is aligned with investors and the long-term future of the business. On the other hand, Musk seems to be enjoying polarizing everyone else in the short-term.

Since taking over Twitter, Musk has mostly been tweeting jokes through the chaos. His tweets about advertisers remain some of his most illuminating into his true plans for the platform. On Twitter, as with all social platforms, advertising comprises the largest share of total revenue, roughly 90 percent. Back when Musk’s tweets were only getting a couple thousand likes in 2019, he tweeted how he really feels, declaring, “I hate advertising.”

Now with Twitter Blue, Musk sees charging for verification as a way not just to get away with a quick cash grab from users unwilling to let go of their checkmarks, but he also indicated that he saw subscription as a way to remove Twitter’s reliance on advertisers.

Inside Musks’s mind

Twitter hasn’t even had its Q3 earnings call yet, but Musk is publicly tweeting about a “massive drop in revenue due to activist groups pressuring advertisers”. Musk’s overarching strategy is clear:

1. Remove reliance on advertisers

2. Tilt away from “activist” sentiment

In Musk’s original pitch deck proposal for the Twitter acquisition, leaked by the New York Times, Elon Musk has grandiose plans that include quintupling the company's revenue by 2028 and generating nearly $50 million from "X Subscribers."

Among the claims in the deck:

• He'll quintuple revenue to more than $26 billion by 2028. Last year, revenue was $5 billion.

• He'll cut the social media platform's reliance on advertising, which will comprise less than half of revenue by 2028.

• He'll add nearly $70 million in revenue by 2025 "Twitter Blue," a premium service introduced last year that lets members customize their experience for $3 a month.

• He'll generate nearly $50 million from a mysterious product called "X Subscribers," also by 2025.

• He'll hire nearly 4,000 employees by 2025, up from around 7,500 now. (lol).

Under Musk, advertising would fall to 45% of total revenue, down from ~90% in 2020. In 2028, advertising would generate $12B in revenue and subscriptions nearly $10B, according to the deck. That would mean Musk expects 69M users on Twitter Blue by 2025, and $15M in revenue from a payments business in 2023 ($1.3B by 2028).

Republicans buy sneakers too

We can all learn a lot — both good and bad — from Musk’s other businesses: Tesla, SpaceX, Hyperloop, OpenAI, The Boring Company, and NeuraLink. There may be some methods to his madness. Musk’s strategy can be characterized by common themes across three areas: what fits into his vision for problems to solve, how he designs an organization as a solution to those problems, and why he can so effectively mobilize resources towards those solutions.

Chief of Musk’s intentions for Twitter is to capture more value. Understandably, by controlling a whole ecosystem, firms can capture excess value. Musk’s tweets since the acquisition can be seen as attempts to appease a more Conservative user-base on a platform that has traditionally tilted Left.

Musk’s thinking is the same as Michael Jordan’s “Republicans buy sneakers too” comment. In 1995, Jordan was a three-time champion returning to the NBA from his baseball hiatus trying to make his sneaker line successful. Jordan was reluctant to endorse a congressional candidate, thereby potentially harming sneaker sales among Conservatives.

Yet this approach may have impairing network effects in the ecosystem. Twitter now faces a fundamental trade-off between value creation in the long-term and value capture in the short term. Musk’s approach could inherently limit how third parties can contribute to the ecosystem. For instance, another company Musk founded, The Boring Company, planned 12-foot-wide tunnels that are 5 feet narrower than the standard width used for city metros and incompatible with existing trains.

Will Conservatives buy subscriptions too

Musk’s interest and subsequent acquisition of Twitter coincided with a wave of “anti-woke” investing on Wall Street. One exemplar of this is the rise of the anti-ESG ETF. The asset bets on a growing investor backlash against ESG-focused proxy voting patterns among the largest players in the ETF space. (Cough, Blackrock).

This calendar year, there has correspondingly been an increase in "anti-ESG" proposals. These are disingenuously submitted proposals, usually by groups that oppose the work of "pro-ESG" investors. Many advisors believe the intent behind some of these proposals is less to offer a constructive path to change and more to disrupt a movement that is gaining steam. In short, hinder pro-ESG groups via proxies and negate the efficacy of pro-ESG proposals.

The only way to pursue a high-scale, high-complexity problem like building a platform loved by both the Conservatives and Liberals is with patient capital. And Musk certainly has access to capital. Across eight of his companies prior to Twitter, he has raised over $34B. Neuralink alone has raised more than triple the amount of capital raised by Amazon.

This relationship between Musk and his investors is the core factor that enables his strategy. It’s also the hardest to replicate. Most Wall Street analysts struggle to rationalize how it works, and most CEOs watch as markets cut Musk slack they could never get themselves.

Now, all eyes are on Twitter’s Q3 and Q4 earnings calls to see just how much slack investors have left for Elon.

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