Commentary: Here’s what Elon Musk buying Twitter tells us about the economy
The mantra of growth at all costs of past years is now ending. With inflation, interest rate hikes and geopolitical uncertainty, the winning qualities of companies have changed, say IMD business researchers.
LAUSANNE, Switzerland: The world’s richest man is not known for austerity. Companies Elon Musk founded or leads are “moonshots”: SpaceX, The Boring Company, Neuralink, Starlink, OpenAI and, of course, Tesla are all based on lofty ideas that are borderline insane.
Big science projects always require big funding. Had Telsa not received a US$465 million federal loan from the Barack Obama administration’s 2009 Recovery Act, we would not have Model S today. The electric vehicle company would have long ceased to exist because it was then close to bankrupt after burning too much cash.
It is therefore interesting to see Musk going the opposite direction with his plans for Twitter. The latest wrinkle is that he’ll put the deal on hold, pending investigation on the number of fake accounts on the platform.
Such diligence came surprisingly late, given he bought it for a stunning US$44 billion in April. He is, after all, not seeking to revolutionise social media as we know it – he wants to turn it into a money-making machine.
A NEW PLAYBOOK FOR TWITTER
In his presentation to investors, Musk proposed diversifying Twitter’s revenue from sole reliance on advertisements. That should not be a surprise given that he was a founding member of PayPal.
Twitter, for all the influencers it attracts, never helps creators monetise their content. Musk now wants Twitter to be great at e-commerce – from hosting livestreaming to collecting tips via micropayments.
There will also be new features available only for subscribers, and corporate and government accounts can expect to pay a fee to remain active. Data licensing will become possible for third parties.
To do all these without exploding the headcount, the current workforce will be slashed before hiring resumes. The number one priority is to free up cash flow to pay off the debt required for the takeover.
If all this sounds drastic, the world has changed even more drastically. The craze over pandemic meme stocks is coming to an end. Whether it’s Peloton, Zoom, Roku, Shopify, Spotify or Netflix, they exploded at a time when credit was cheap.
They had pulled future demand because of the COVID-19 lockdown, but now that is no more. Roughly half the stocks on Nasdaq are down 50 per cent from their 52-week highs. And that slide may continue as the US Federal Reserve continues hiking interest rates in a bid to tame inflation.
It is in this context that Musk is playing by the new rules of the game. Not only does Musk expect Twitter to improve its profitability, he also expects consistent growth in operating cash flow. He is paying attention to the “quality” of Twitter’s earnings, so that it will be ready for a economy tilting toward uncertainty.
Musk is changing the way he sees the world. The question we should be asking is this: If the mantra of “growth at all costs” of the past years is now ending, what type of companies will win when inflation rises, interest rates hike, geopolitics flare and the economy slows? What are the hallmarks of future-ready companies in other sectors?
WHO IS READY FOR TOUGH TIMES AHEAD?
At IMD’s Center for Future Readiness, we track which companies are the most future-ready. Our latest ranking of financial services companies shows Musk is right to brace for uncertainty.
The pattern for 2022 is unmistakable – especially when compared to that of previous years. In 2021, fintech companies – PayPal, Block (formerly Square) and Ant – all topped the list.
Fintech is big, but “traditional” banks now have a window of opportunity to get back in. This year, Block landed at sixth place behind two stalwart banks: JPMorgan Chase and DBS.
The key strength of fintech companies has always been their technological prowess. They have typically targeted younger generations with services at low or no fees. However, such advantages were made possible, in large part, because interest rates were at near-zero.
That cheap funding is now drying up with interest rates on the rise. Investors are demanding, at the very least, a clear demonstration of a sustainable business model.
It is becoming harder to keep running any money-losing strategies to grab market share, which is why companies that rose to fame during the pandemic are now hitting a wall while “old reliables” regain their footing.
Business diversification also makes good sense in 2022. Even a regional bank like DBS follows such an approach. Its platform business now includes marketplaces such as car-selling, property rentals and special deals for electricity, mobile, and broadband. The bank’s latest quarter earnings remained robust despite weak markets, and were the second-highest on record.
However, the growth did not happen across business segments. Net-fee income fell because wealth management and investment banking are slowing. Consumer loan-related activities, insurance income and card fees all grew. These exemplify the importance of business diversity in today’s environment.
Still, this does not mean big banks and insurance companies can stop innovating. Business as usual can only guarantee a slow but ultimately long-term decline.
HOW THE SMARTEST COMPANIES LEVERAGE OTHERS
Companies need to win today while preparing to win tomorrow. The smartest companies see competition as a non-zero-sum game and embrace open standards, whether in blockchain, artificial intelligence, robo-advisory or digital payment.
The reason is simple: Large players are always too slow to spot the next disruption. Nimbler innovators are likely to start game-changing offerings.
Still, the fundamental purpose of these innovations is always the same. In finance, it is always about moving money around, pooling risk or lending money between parties.
That is why top-ranking companies like Visa and Mastercard partner with PayPal to clear transactions. Mastercard also makes sure crypto giant Coinbase uses its network for peer-to-peer exchange of digital goods minted as non-fungible tokens (NFTs).
Incumbent players like Mastercard and Visa repurpose legacy infrastructures, while investing aggressively in new interfaces and APIs. They make them easy to use but also secure to adopt.
So whether you sign up for Apple Pay, Google Pay or Revolut, the payments you send still rely on the vast networks of Visa and Mastercard.
Mastercard and Visa choose to focus on building world-class technologies for other fast-moving companies to leverage. Both started off as credit card operators but that is ancient history. Today, it does not matter if you draw down your credit line, use fiat money or some cryptocurrency – they are all there for you.
Open banking, co-competition, and open innovation are ideas that executives have been preaching for a long time. But what has changed in the current environment is that the tough economy is giving big players a chance to catch up with nimbler upstarts.
Even so, most will likely squander the opportunities. Only a few will seize the moment to reinvent.
Howard Yu is Lego’s chair of management and innovation at the IMD Business School in Lausanne, Switzerland and research director of IMD’s Center for Future Readiness. At the Center, Jialu Shan is Research Fellow, Lawrence Tempel is Research Assistant and Zuriati Balian is Data Science Intern.