After the past few months, Elon Musk is no longer the richest man on Earth and has become the first person in history to have lost $200 billion, Tesla’s stock has dropped dramatically, and Musk has potentially sold more Tesla stock to support Twitter.
Twitter’s new status as a private company means that the public has little insight into its finances or technological health. Musk claimed only days after he purchased the company that bankruptcy was possible. Given the tremendous amount of debt that Musk took on to purchase Twitter—whose annual payments on debt will far outstrip the annual profits even before advertisers fled the site—floating the possibility of bankruptcy was not unexpected. Currently, Twitter needs $1 billion per year to pay its interest, and this does not account for the hundreds of millions or billions of dollars that will need to be reinvested into the company to rebuild it with new hires. To cut Twitter’s costs, Musk has initiated repeated layoffs, provided less severance than publicly promised, stopped paying rent at some of Twitter’s offices, and shut down a data center that provided critical reliability and redundancy. Despite all these attempts to cut costs, Musk himself says, “Twitter isn’t secure yet, just not in the fast lane to bankruptcy.”
As technology and culture writer Max Read noted in a recent newsletter, one of two critical questions for Twitter’s future is: “How much money is Musk willing to burn on the project?”
The problem is that arresting and reversing the decline in functionality is going to take a lot of money and a lot of time. One of the ironies of the Musk takeover is that Twitter — a mismanaged company with great tech and a captive, influential user base — was probably a pretty good candidate for a competent leveraged buyout operation. Musk, egged on by his friends and their weird psychodrama about “blue checks,” has now eliminated any possibility that his takeover will be smooth and inexpensive. He’s on the hook for the billion-plus dollars it will take to return Twitter to the state it was when he bought it — let alone to improve it and make it more efficient. How long is he willing to keep trying before declaring bankruptcy and moving the company off his books?
Normally in a bankruptcy, the company would not necessarily cease operations. But in the months since he purchased Twitter, Elon Musk has fired more than half the staff and had hundreds more employees quit after he delivered an ultimatum to the remaining staff to go “extremely hardcore” or quit. This left Twitter with a skeleton crew of just 1,300 employees as well as engineers on loan from his other companies. It’s now unclear how long those remaining can keep the site up and running and fix the bigger problems that may develop along the way.
Should Musk declare bankruptcy, or even if he does not declare bankruptcy but Twitter limps along bleeding money and users, it will not be long before another company’s acquisition of Twitter from Musk not only becomes possible but may be its only option for survival. Regulators and others in the U.S. government must prepare for this possibility and prepare to act quickly to address the anti-competition dangers of such as acquisition and prevent the potential misuse or abuse of users’ Twitter data.
Regulators must prepare for the possibility of a large tech company’s acquisition of Twitter
In the event that Twitter finds itself in a position where it must be acquired, it is highly likely that one of a few existing large technology companies, such as Microsoft, Salesforce, or Google, may be the only possible buyers who would be willing and able to keep the service running. These companies could pay the cash for the service, manage to provide technical talent to sustain the platform and then recruit to rebuild it, and manage the financial loss from the site for years to come until it has been strengthened. Of the few suitors, several have considered purchasing Twitter in the past.
There has been a growing recognition among scholars, lawmakers, and technologists of the dangers of allowing large tech companies to acquire themselves into positions of strength, foreclosing competition or reinforcing their own market dominance.
Regulators should begin now to think about how to handle the possibility of a Twitter acquisition, especially since it may happen quickly if Twitter runs short on cash or begins to fall apart at high speed. The acquisition of Twitter, whether in bankruptcy or in a sale, raises complicated considerations for regulators, especially as they have begun to recognize the danger of acquisitions in the digital platform space:
- While Elon Musk paid a premium for Twitter at $44 billion dollars, the site’s social graph is still a valuable asset, especially if it can be made fully functional again.
- Given the number of staff who have already been lost at Twitter, it will likely require a large infusion of existing technical talent to stabilize the site after an acquisition and to fund and recruit new talent to rebuild it.
- Given that Twitter was not particularly profitable even before Elon purchased it, such a purchaser would need to be able to bear financial losses for many years while it rebuilds.
Over the past few years, there has been a growing recognition among scholars, lawmakers, and technologists of the dangers of allowing large tech companies to acquire themselves into positions of strength, foreclosing competition or reinforcing their own market dominance. In the case of social media platforms such as Meta/Facebook or YouTube, their market power rests in large part on the platform’s “network effects.” When the number of users is large, a platform becomes more attractive to other users. And once it is widely used, users are “locked in” because everyone else—or everybody else within a particular audience, such as journalists or college students—is using it. This creates a barrier to entry for smaller or newer tech companies and gives the incumbent platform market power, especially in cases of entities with social graph network effects, described below.
Combining platforms already protected by network effects is likely to create an entity with even more market power. The acquirer will now have access to information about the behavior and preferences of a large new set of users, which can be combined with and enrich what it knows about its existing users. This is likely to give the acquirer greater insight into the both sets of users, enable it to manipulate the online behavior of a greater number of people, and allow it to more effectively target them for advertisers. Moreover, any potential competition between the two platforms will be gone.
The U.S. government must act to promote competition and prevent misuse of user data
In recognition of these dangers, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) put out a “Request for Information on Merger Enforcement” earlier this year to potentially modernize the merger guidelines with particular interest on digital markets. The DOJ and the FTC have not yet issued any revised merger guidelines, but updated guidelines might shed light on how enforcers might view an acquisition of a distressed company such as Twitter, whose alternative is possibly just shutting down.
Read more on legislation to promote competition online
The Center for American Progress submitted comments on the merger guidelines earlier this year. CAP emphasized, “The Guidelines should recognize the potential for competitive harm arising from digital platforms with strong network effects acquiring other competitors with network effects, especially if either firm enjoys social graph network effects”—that is, that network effects are particularly powerful in digital markets and especially with social graph network effects. As noted in CAP’s comments to the DOJ and FTC:
The presence, strength, and type of network effects at play in markets with proposed mergers should be explicitly considered by the Guidelines. Agencies should approach with skepticism a digital gatekeeper who enjoys network effects proposing to acquire a company that also possesses network effects.
Agencies should give special scrutiny in cases where firm network effects are created by a “social graph:” the individualized networks of one- and two-way connections to friends, contacts, and interests created on the digital platform by each user. The social graph concept was popularized and refined by Facebook. An individual’s unique social graph is of significant value to the individual user but provides minimal utility to other individual users: the value is person-specific. For a platform that facilitates these connections, individual social graphs together compose a social network, which provides immense aggregate value to the digital platform. Platforms use the data from an individual’s social graph to target advertisements and to craft individualized content feeds or other engagement opportunities.
The comments further stated:
The uniqueness of each individual social graph on a digital platform creates significant lock-in. High switching costs for social graph platforms might be far greater than for a digital platform which enjoys direct or indirect network effects not created through social graphs. Social graph network effects are also more defensible in that they are harder to recreate than direct network effects, given that they require actions beyond just joining and using a platform. Even a social network with the ability to export their social graph (which is often foreclosed) requires both the user and their connections on the old platform to be present on the new platform to provide any potential recreation of the existing graph.
Finally, the comments warned of the anti-competitive effects of such an acquisition:
Stratechery’s Ben Thompson, a prominent analyst of tech business models, made the case around the impact of “networks buying networks” this way: citing multiple lock-ins and the strong network effects of a social network such as Facebook, he argued “I would go further and make it prima facie anticompetitive for one social network to buy another. Network effects are just too powerful to allow them to be combined.”
Given the danger in allowing a platform with strong existing social graph network to acquire Twitter, if a purchase becomes necessary to avoid the alternative of Twitter shutting down, regulators should favor those companies that do not have platforms with large existing network effects in order to attempt to keep alive the nascent competition that Twitter provides. In addition, regulators should consider conditions on any purchase of Twitter, including mandated interoperability, data portability, and researcher access.
While Twitter’s value as a company is mostly tied to a functioning and operational social network, its rich and huge store of personal data, collected from its 15 years of operation, is its other asset. Unfortunately, those personal data are still valuable even if the website itself is not operational. Should Twitter fail and shut down, there are numerous security, privacy, and national security considerations around that trove of data. The U.S. government should prevent a foreign company from purchasing Twitter to ensure foreign entities don’t gain access to a stockpile of personal information about dissidents, political figures, and journalists among many others.
Just as critically, the federal government should move to ensure that Elon Musk does not provide access to private information or sell those data in order to find some fast cash. The existing FTC consent decree with Twitter should provide some basis for that intervention. If Twitter declares bankruptcy, there are also questions around whether some of those private data could be sold to settle the debts, which could be a huge security risk.
Finally, the FTC may need to ensure that data are secure from hackers or foreign nation states.
The options related to this situation are thin—the direct consequence of the creation of powerful platform that exists only in private hands and wealth so concentrated that the richest man on earth can purchase the closest thing we have to a public square.
Additional legislation could help with this situation or to develop alternatives. For example, the American Innovation and Choice Online Act would ensure that even if Twitter were acquired by a qualifying covered entity under the legislation, certain nondiscrimination and interoperability will be guaranteed with Twitter. It might also allow new social media services the chance to grow. A federal privacy law might lessen the risk of Twitter selling user data in a fire sale to pay the bills.
This may all be for naught. Elon Musk may manage to keep Twitter running. He might even make it great again. It is also possible that Musk has lost so much money and so much pride in purchasing Twitter that he would rather it die forever than be sold at a loss to others.
Either way, it is important for regulators to start thinking about these possibilities and to prepare for the possibility that Elon Musk, famously disdainful of laws and regulators, may take even more rash steps than he already has.