Elon Musk is paying $44 billion for a company that has lost money in eight of the past ten years.
Is he smart as a fox or dumb as a doorknob for taking over a loser of a company? Could he really make it consistently profitable? And will be rein in or open the floodgates to even more hate speech than currently exists on Twitter?
Business school professors generally have their doubts–and some unequivocally believe that ego rather than savvy business sense in the motivator behind the deal for the founder of Tesla, SpaceX, construction firm The Boring Company, and a neurotechnology company called Neuralink Co. Wharton’s Adam Grant puts it this way: “Serious question: how many complex companies can one person lead responsibly at the same time?,” wrote Grant on Twitter. “Free speech shouldn’t be a license to troll,” he added, noting a study of 36,000 Reddit communities that found that 38% of all attacks are started by 0.1% of communities. Toxic platforms let hostility run rampant. Healthy ones have moderators and penalties for repeated aggression.”
‘Let’s See Him Create A New Social Media Company Instead Of Taking Over This Hate Speech Platform’
“While there are great hopes for the creative promise of this extraordinary innovator, it is still a bad thing,” says Jeffrey Sonnenfeld, senior associate dean for leadership studies at Yale’s School of Management. “If this guy is so brilliant why doesn’t he create the new mousetrap. There was a Friendster and a Myspace and then Facebook came along and blew everybody out of the water. Let’s see him create it instead of taking over this hate speech platform.”
He has scant hope that Musk would clean up the discourse on Twitter. “Nobody can tell you five people that have been taken off Twitter for hate speech,” says Sonnenfeld. “It’s become this bizarre narrative captured by the left and the right. Donald Trump only got taken off with incendiary hate speech and an insurrection. The other was Alex Jones after he attacked the families who lost their children in the Sandy Hook massacre. That is not protected speech. Even in the town square he would not have been able to shout that without being punished for civil defamation. Even Musk himself went on repeatedly disparaging the vaccines and undermining the reality of the pandemic. This technology wizard should understand science . I don’t think this is good for advancing knowledge.”
Ultimately, Sonnenfeld thinks the purchase is a “diversionary maneuver” to minimize deeper scrutiny of Musk’s numerous pronouncements that have proven illusive. “The purchase of Teslas in China is about to plunge and the production of Teslas there has been curtailed,” he says. “We are three years past his promise that there would be a three million sized fleet of taxis composed of Teslas. Where is that massive revolution of the auto insurance business that he promised? Where are the tunnels connecting six cities through his Boring Company?”
David Touve, senior director at Darden’s Batten Institute at the University of Virginia, believes Twitter’s poor financial performance is evidence of a broken business model. Essentially, the traditional ad-driven model for social media is broken,” says Touve. “These companies make far less per user per month than a local coffee shop, in exchange for far greater amounts of data on our lives. Twitter’s past financial performance is a sign of this broken model. Yet, market expectations make it very difficult for a public company to experiment. The acquisition could simply be about taking Twitter private, as doing so is the only way for the company to possibly discover what the next and more sustainable model for social media should be. If the experiment works, perhaps wholly new sources of value — not all of which have to be financial — can be unlocked. If things don’t work out, the acquisition was one of the most extravagant weekend shopping sprees ever had by a billionaire.”
Ross School of Business professor Nejat Seyhun believes Musk will ultimately turn to a subscription business model that is less dependent on the tastes of advertisers that has caused Twitter to exercise what he believes is “a lot of outright censorship. “Musk wants to move away from the advertising model into a subscription model,” says Seyhun. “He believes that transparency of its screening algorithms and more free speech for all parties will allow its users to have a greater say into how Twitter is operated. The end result is that free speech will definitely increase on Twitter. Whether this makes business sense for Musk depends on whether the subscription model is indeed a better model than advertising. For that, we will have to wait and see.”
Some Profs Think There Is Financial Upside To The Musk Takeover Of Twitter
Yet, a number of profs believe there is financial upside in the deal even though Twitter lost nearly half a billion dollars last year on more than $5 billion in revenue. “The potential is still there because it was trading above $70 earlier in the year,” reasons Sonnenfeld. Musk is paying $54.20 a share, a 38% premium over the company’s share price this month before he revealed he was the firm’s single largest shareholder. “There is a lot of opportunity and there is something they could do with revenue streams. He should be able to do more.”
Kevin Crowley, a senior lecturer at Emory University’s Goizueta Business School, agrees, though he points out that any traditional financial analysis would cast doubt on the transaction. “As a finance guy who focuses on fundamentals, Twitter like many companies is valued more on hope than reality,” says Crowley, who once headed the mergers and acquisitions group at Deutsche Bank in its New York and Tokyo offices. “The finances look bad if you look at the bottom line and particularly cash flows. But the top line has been growing. They just have not been able to convert it into a profitable business. It’s hard to use basic corporate finance forecasts and discounting to justify what Musk is paying. But having said that I think there is a reasonably good chance that he does transform the platform into something that will become more profitable. If anybody can do it, I think someone like him is more likely to do it than more conventional owners.”
Crowley points to his success at building a viable auto company from scratch. “I don’t know what he would do if the deal goes through, but there is a reasonably good chance he can transform it somehow. I don’t think that General Motors would have been producing an electric Hummer or an electric Corvette or Ford would be producing an electric F-150 if not for Elon Musk. Will he have the same impact in the social media sphere? I hope so.”
That may well be the general consensus. “I think this Twitter purchase by Elon Musk has more potential upside as he has the means and the vision to achieve future profitability for Twitter – more than they have had as a public company,” says Steve Raquel, a clinical assistant professor in marketing at the Gies College of Business. “I suspect his vision for Twitter moving forward goes beyond a mere concern about free speech, but is part of a larger goal focused on making Twitter’s offerings a key component in future communication, monetization, and advertisers’ efforts.
“And in buying Twitter,” adds Raquel, “Musk is quickly assembling an impressive collection of various companies and technologies that, if effectively integrated together, will make him even more influential, if not substantially more wealthy, than he is today. Just imagine driving autonomously while sending tweets and paying for Starbucks using Dogecoin integrated into your Tesla’s digital wallet? It could happen. So, the real question we should really be asking is, are we ready for the future Elon Musk is planning for us?”
‘Musk probably won’t make Twitter consistently profitable’
University of Michigan Ross School of Business professor Erik Gordon says Musk buying Twitter will have upsides and downsides for users. But for Musk himself, the deal makes sense — despite the unprofitability of the platform.
“Twitter users will like Musk’s ideas,” Gordon says. “They will like a free speech forum without arbitrary, anonymous, Orwellian moderators. They will like less spambotting. They won’t like hate speech if it gets through under the free speech cloak. We like free speech, as long as it doesn’t offend us.
“Musk probably won’t make Twitter consistently profitable. If you are the sole owner (with billions in your pocket), you don’t have to make it profitable. You just have to make it throw off enough cash to pay the interest on the money you borrowed to buy it.
“It’s a smart move for Musk because he wants to be sure that no matter what he wants to Tweet, he can Tweet. That’s a higher priority for him than making lots more money. He is using some of his money to buy freedom of speech, at least for him.”
Greg Fisher, an associate professor of entrepreneurship at the Indiana University Kelley School of Business, echos the notion that Musk doesn’t have to make money on the deal. “Elon Musk buying Twitter is less about Twitter as a business and much more about Twitter as an influential media platform,” says Fisher. “Musk has created enough value elsewhere (Tesla and SpaceX) that he does not need to immediately worry about making Twitter profitable. However, ownership of Twitter allows Musk to exert control over one of the most influential media channels today; he can mold Twitter’s rules and algorithms to reflect his worldview, particularly pertaining to free speech, censorship, and media gatekeeping.”
Fisher thinks Twitter was “relatively cheap” given its sphere of influence. “This allowed a wealthy individual to step in and take it private, and thereby exert control,” he notes. “It is not uncommon for billionaires to target media companies so that they can use their wealth to exert their influence in ways that extend beyond just wealth creation. The prime examples of this are Jeff Bezos buying the Washington Post, and Marc Benioff acquiring Time. This is just a new media example of the same phenomenon. Its more about influence and less about business models and profits.”