@elonApril 8, 2022
Desperate to recapture a delinquent attention cycle that’s wandered off to war, Elon Musk announced Monday he is the largest shareholder in Twitter, with a 9.2% (correction: 9.1%) stake. @elonmusk has trolled me (i.e., called me names on … Twitter) before … but this feels like cosplay.
I’ve been taking activist positions in companies (i.e. participated in $800+ million worth of investment and advocated for change at a publicly traded firm) for the better part of two decades. I’ve served on the boards of seven public companies. In December 2019 I took a stake (approx .03% the size of Elon’s ownership) in Twitter and wrote a public letter to the board, highlighting the company’s lack of innovation and weak shareholder returns, and calling on them to replace part-time CEO Jack Dorsey. I received no response. Shocker. Although the chairman’s son tweeted at me that I shouldn’t be so harsh on Sheryl Sandberg. So … there’s that. A few months later, Elliott Management, a large activist fund, called me and said they were signing my letter with a $2 billion pen. They bought a significant stake in the company and secured two board seats in record time, as the directors realized they’d been acting like sycophants vs. actual fiduciaries. Once Elliott had representatives on the board, @jack was gone. It was just a matter of optics and cadence to make it appear as if it was his idea — ego still drives the majority of decisions around corporate governance. (And war.)
Elliott has done Twitter’s shareholders — and corporate governance — a service advocating for the crazy idea that the CEO should work full time. @jack is a great CEO of Block, but he was a shitty absentee father at Twitter.
The Song Remains the Same
Twitter’s fundamental problems remain, however, and by early this year its shares had retreated back below $40. I began (again) meeting with funds to discuss taking a position and advocating for change. My pitch: Twitter is among the most important products in history (real-time news source, global communications platform), yet it remains a lackluster investment.
The company flounders in a cesspool of ad-supported media, sacrificing quality for attention in the pursuit of profits it will never realize. Twitter defines the term “subscale” in a digital landscape where three giants command 80¢ of the digital dollar: Google, Meta, and Amazon.
Twitter’s inability to monetize is reflected in its valuation. In late January, before Elon started buying, the stock was trading at a significant discount to Meta and Snap.
What to Do
Twitter should move to a subscription model (#fuckingobvious). Corporate users and users with large followings would pay for a fraction of the value they receive. I have long advocated for this model; by shifting the company’s revenue source from advertisers to users, subscription aligns economic incentives with user experience, rather than user exploitation. This leads to a myriad of benefits, which is why recurring-revenue businesses register greater growth and retention and bigger valuations.
Nothing better illustrates the value of Twitter to its users than Tesla. The carmaker spends almost nothing on advertising (GM spends $2+ billion per year), yet it has built the best brand in the industry. This is a function of performance (outstanding products, exceeding targets) multiplied by reach. The reach is a function of Elon’s 80.9 million PR agents (i.e., his Twitter followers). The social network could charge Mr. Musk $10 million a month and — after making a series of ad hominem attacks on the board/company/CEO — he would pay it. Nearly every Fortune 10,000 company and A/B/C list celebrity who uses the platform as a real-time communications tool would pay fees scaled by follower count.
In addition, ad-supported media is what drives the enragement cycle, the bots, and the misinformation plaguing Twitter. Cleaning that up would be good for business, and for the commonwealth. False stories on Twitter are 70% more likely to be retweeted than true ones — and spread six times faster.
On the basis of this pitch, I had soft-circled substantial capital. We were working through this crazy thing called SEC rules and regulations. How would we structure the special purpose vehicle? What were the Hart-Scott-Rodino requirements if one capital source provided more than 50% of the investment? Would my background advocating for change mean we’d need to file a 13D (active) vs. 13G (passive)? You know, “the law.”
By early April we’d spent the better part of a month sorting through these issues. But TWTR was suddenly on a tear, up 20% in two weeks. The market had perceived the shape of a whale moving beneath the surface. My team speculated that another big activist fund was accumulating a position and we updated our models. Then the whale breached.
To be clear, there’s a lot to like here. Elon correctly saw the opportunity and seized it. Twitter was dramatically undervalued and should be better. And the board was smart to embrace him and give him a seat. The easiest way to silence an activist is to make them an insider. Corporate governance is out of fashion in an era of dual-class public stock and a dangerous diminution of government. But Twitter is 2 for 2 in recent months, showing Jack the door and putting a large shareholder on the board.
In addition, Musk is a genius. He leads two companies that are simultaneously revolutionizing important industries. Tesla makes the world’s best cars and has accelerated industry adoption of electric vehicles by years. The same day he disclosed his Twitter stake, Tesla announced record shipments. But in my view, Tesla isn’t even his most impressive company. SpaceX’s reusable rockets are fundamentally changing the economics of space hauling, core to our future infrastructure. In sum, we have the preeminent entrepreneur of his generation, who’s taken a seat on the board of a company that needs to command the space it occupies.
Glass Half Empty
For starters, Musk’s track record is mixed when it comes to errant distractions from the businesses he’s responsible for. Over the past several years, he’s been reckless, toying with companies, cryptocurrencies, and technologies that captured his fleeting attention only to move on when the next shiny object caught his gaze.
To date, Elon’s stated objectives for Twitter are vague, and clearly bullshit. His main beef with Twitter, it appears, is there’s too much moderation.
Where to begin? Some basic law: Free speech is essential to a functioning democracy, but free speech is a protection from government limits on speech. Free speech doesn’t limit Twitter … it protects Twitter. Rigorous adherence to the principle of free speech means Twitter shapes its own voice, which, if it decides, is not amplifying hate speech, false speech, or speech calling for insurrection. Users who want that content can find it elsewhere, such as 4chan, or Truth Social (not really … DOA). Free speech principles are government principles, just as censorship is government action. Everything else is competing speech.
Moreover, Twitter is an important space for communication, but “free speech principles” and “democracy” do not require or even suggest that Twitter let anyone say anything. On the contrary, they militate for reasonable moderation. An unfettered forum is not free, it’s an invitation to mob rule. If Twitter is the “de facto public square,” that’s because the site moderates content, not despite its efforts to do so. Almost nobody wants unfettered speech on Twitter. Imagine your email inbox but with no spam filters … times 280. Moderation is why 4chan gets 20 million users per month, while Twitter gets 217 million users per day.
In practice, Elon’s interest in “free speech” has been mostly about intimidating journalists who wouldn’t be stenographers for his unfounded claims. His solution was a website where people could vote up or down on journalists, where the magic of crowds would fix media. He wanted to call it Pravda. Today, Pravda, like so many Elon missives, is long forgotten, and Elon’s answer to the problems facing Twitter is: “Something … something … open source.”
This echoes a long-standing interest by @Jack and others at Twitter, including new CEO Parag Agrawal, in a future version of Twitter that’s “decentralized.” A web3 Twitter, if you will. Specifics are absent — it’s easier to vomit a buzzy word salad. Users will be able to configure their own moderation, no centralized authority, all the same crypto-web3-decentralized BS that has resulted in few real products or services, but has secured billions of dollars for VCs and (other) grifters. The notion that hundreds of millions of Twitter users are all going to tinker with their personal moderation algorithm is as likely as people connecting directly to the blockchain with their handheld phone.
Opening Twitter to outside parties could be powerful, and there’s potential for a new architecture that would let different flavors of Twitter evolve. That’s the idea behind Bluesky, which Twitter created and funds. But a) Twitter is already pursuing this, they don’t need Elon on the board for it; and b) there’s no commercially viable version of Twitter without moderation. Whatever emerges from Bluesky, it will still need centralized entities that filter content and make judgment calls, or the system collapses into chaos.
Musk’s call for a Wild West version of Twitter isn’t surprising, as it’s consistent with an emerging Valley ideology I label “takerist.” Takerists view the commonwealth as a hunting ground for personal enrichment and amusement vs. a community invested in mutual prosperity. The great taste of community — roads and charge stations, EV tax credits, air traffic control for Gulfstream 650 ERs, public universities that graduate engineers — with none of the calories — taxes, laws, the basic comity of man.
True to Form
We found out Elon was Twitter’s largest shareholder on Monday morning, because that’s when he disclosed his holdings to the SEC, as required of anyone who acquires more than 5% of a public company. Only Elon filed the wrong form, and he filed it nearly two weeks late. He filed the form for “passive” investors — and if you’ve been talking to the CEO for the past few weeks about joining the board and changing the product, you are not a “passive” investor.
Elon filed the correct form (Schedule 13D) the next day, but it requires more fulsome disclosures, which revealed he had crossed the 5% threshold on March 14. Meaning he’d been obligated to disclose his stake back on March 24. By illegally concealing his stake for 11 days, Musk was able to continue buying shares from sellers who didn’t know he was accumulating a huge position. Had he disclosed his shares properly on March 24, TWTR would have shot up 25% then, instead of on April 4, and the shares he bought subsequently would have garnered selling shareholders approximately $150 million more. That’s fraud, and while I have increasingly less confidence in the SEC, Congress has recently beefed up its power to seek disgorgement of ill-gotten gains for securities law violations. Shareholder lawsuits may also be in the offing.
Even if the SEC acts, $150 million is immaterial to Elon. On a relative basis, his entire $2.5 billion investment in Twitter is about the price of a MacBook for the average household. A $150 million fine is buying an extra charger. Takerists such as Elon are exempt from the law — they can buy their own. The rest of us would be left with a Musk-flavored Twitter, which would look similar to the replies to his announcement: a septic tank of crypto scams, far-right blather, and screeching wokeism. For all his complaints about “free speech,” Elon has always been able to speak his mind. Or if not, what hasn’t he said?
Whatever we think of Elon’s move, he’s made it, and the future of an increasingly important media company is increasingly up to him. He “only” owns 9%, but his influence far exceeds that. Even on a strong board (vs. one that would tolerate a CEO on permanent safari), a mega-billionaire celebrity will command outsized influence.
As with all things Elon, it’s the Elon show (unless/until he gets bored and moves on to the next shiny object). Pop quiz: Name somebody else who works at Tesla, SpaceX, or The Boring Company.
Elon bumped the stock, but he’s also likely removed any takeover premium. His antics and wealth make him a human poison pill — neither a financial buyer nor a strategic acquirer wants to deal with the chaos and unpredictable behavior he brings. And Elon himself signed away his right to buy more when he joined the board. The market sensed these issues and, after its initial explosive gains, the stock began to check back.
Prediction: Even the flaccid SEC has to do something here … and that will be an unwelcome distraction for the Twitter board.
20 years ago I joined my first public company board. I was obnoxious, constantly heckling from the cheap seats and more concerned with getting credit for change than increasing stakeholder value. Two decades and seven boards later I’ve finally (I think) embraced what it means to be a fiduciary: to represent the interests of others. Elon is the most brilliant product engineer of this, and likely the last, century. A fraction of that brilliance could transform Twitter. The risk is that his takerism, constant punching down, and cold take on the First Amendment could push Twitter further off course.
Twitter’s future now comes down to one question: Can Elon Musk’s inner child develop an outer man?
Life is so rich,