Good morning,

It is a quiet day on the podcast front; I need to save space in your queue for tomorrow’s Interview.

On to the update:

Musk’s Twitter Blue

From Elon Musk, on Twitter:

It’s difficult to know when to wade into the Twitter saga: Musk’s first week of management has been just as chaotic as the purchase process. Over the weekend, for example, The Verge reported that verification would cost $20/month, prompting an uproar both from so-called “Bluechecks” and people concerned about the fact that verification was, as the name suggests, meant to verify a particular person was who they said they were. In practice blue checks were mostly extended to celebrities and journalists, and it did include some features not available to normal users, including the ability to only see replies from other verified users.

It seems, though, that the leak served a purpose; Musk’s announcement seems to address a lot of the concerns raised by the leak: the price is lower, the features more clearly defined (and attractive), and there will be an alternative label for verification of public figures. To put it another way, a blue check will now mean Twitter Blue, which is being overhauled a bit and getting a price raise. It all seems pretty reasonable and not at all in line with some of the reactions on Twitter — not that Musk seems to mind:

There are two other Musk tweets that are less funny but, I think, more insightful into Twitter’s near-term future. The first was this exchange with Stephen King:

This is, at first glance, literally true; from the New York Times:

Last year, Twitter’s interest expense was about $50 million. With the new debt taken on in the deal, that will now balloon to about $1 billion a year. Yet the company’s operations last year generated about $630 million in cash flow to meet its financial obligations. That means that Twitter is generating less money per year than what it owes its lenders. The company also does not appear to have a lot of extra cash on hand. While it had about $6 billion in cash before Mr. Musk’s buyout, a large portion of that probably went into the cost of closing the acquisition.

These numbers are deceiving; in December 2021 Twitter made a $809.5 million payment to settle a shareholder class-action lawsuit for having allegedly misled investors about user engagement metrics in 2015. Without that payment Twitter’s 2021 cash flow from operations would have been $1.4 billion, which is, needless to say, enough to cover its debt burden. This shouldn’t be a surprise, by the way: while I am sure the banks regret agreeing to fund Musk’s horribly overpriced acquisition, it is silly to think that they would have committed more money than Twitter as currently constituted could afford to pay.

A Twitter Subscription, Revisited

Still, given the deteriorating advertising environment — both in a macro sense, because of the economy, and a micro sense, given advertisers’ potential misgivings about Musk’s management — it does makes sense to push for new revenue streams. It is the other Musk tweet, though, that makes me wonder how far the company could go:

Last year, when Jack Dorsey stepped down and handed the reins to Parag Agrawal, I asked What About a New Business Model?, i.e. subscriptions, and not just for extra features, but for Twitter itself.

So let’s review: there is both little evidence that Twitter can monetize via direct response marketing, and reason to believe that the problem is not simply mismanagement. At the same time, Twitter is absolutely essential to a core group of users who are not simply unconcerned with the problems inherent to Twitter’s public broadcast model (including abuse and mob behavior), but actually find the platform indispensable for precisely those reasons: Twitter is where the news is made, shaped, and battled over, and there is very little chance of another platform displacing it, in large part because no one is economically motivated to do so.

Do read the whole article if you haven’t; the main thing I would add is that I actually think that last line understates the point: I think that Twitter, more than any social network, is sui generis:

• First, the service emerged at a time and place where a text-based network was cutting edge, and while the textual nature of the service significantly limited the service’s addressable market — most people prefer photos and video — that same nature also made Twitter indispensable to those who are textually oriented.
• Second, Twitter grew up in an environment where it was normal to publicly broadcast whatever it was you had to say; today most people reserve their thoughts for group chats and messaging.
• Third, because Twitter was first, it became ground zero for everyone who was textual and had something to say, even if those folks had diametrically opposing viewpoints on everything from Donald Trump to LeBron James. Indeed, that is a core part of the attraction: Twitter is a battlefield, for better and often worse, and while no other startup would want to recreate it for obvious reasons — nor would they be able to, as recent alternatives have shown — that doesn’t mean it isn’t part of what keeps people coming back.

In other words, if Twitter charged for access, people may very well pay because there is not and never will be anything like it.

Anyhow, the reaction to my Article was universal: I was completely out of my mind. And, honestly, I could see the point. After all, I said so in the Article:

Back when Stratechery first started it was fairly popular to argue that social networks should charge users instead of selling ads, which never made sense. I wrote in 2014’s Ello and Consumer-Friendly Business Models:

When it comes to social networks, on the other hand, advertising is clearly the best option: after all, a social network is only as good as the number of friends that are on it, and the best way to get my friends on board is to offer a kick-ass product for free. In other words, the exact opposite of the feature-limited product that Ello is proposing…

If…you care about making a successful social network that users will find useful over the long run, then actually build something that is as good as you can possibly make it and incentivize yourself to earn and keep as many users as possible.

I still stand by that analysis generally, but I increasingly question whether or not it applies to Twitter. Twitter has long since penetrated the awareness of just about everyone on earth; the vast majority gave the platform a try and never came back, content to consume the tweets that show up everywhere from news articles to cable news. The core that remains, meanwhile, simultaneously bemoans that Twitter is terrible even as they can’t rip their eyes away, addicted as they are to that flow of information that is and will for the foreseeable future be unmatched by any other service.

Or, to put it in Musk’s words, “Twitter speaks to the inner masochist in all of us”, except that “all of us” is a relatively small part of the addressable market that will never be a good advertising business, for all of the reasons I laid out in that Article, but which, for the exact same reasons, may have a much higher willingness to pay than conventional wisdom suggests.

That noted, I knew that Agrawal would never take my advice: the risk is absolutely massive, because if conventional wisdom is right, then to make Twitter a subscription product would kill the company; the vast majority of users would never sign up, meaning there was no audience for tweeters, and no audience for advertisers. The death could very well be swift, and that, needless to say, simply wasn’t a viable choice for a public company CEO.

Musk, though, isn’t beholden to the public markets: yes, he has that big debt load, and a coterie of investors, but he also has a valuation that — if I’m right about Twitter being fundamentally unsuited to advertising — may never be matched even if he executes perfectly. Moreover, you could make the case that Twitter going bankrupt would be a win for Musk in the long run, so why not swing for the fences? Oh, and one more thing: a subscription business model is perfectly aligned with splitting Twitter into a service/graph company and app/advertising company.

One other point about alignment. A challenge with Musk’s Twitter Blue proposal is exactly what King said: Musk is seeking to charge the users who provide the most value to the service, because they actually post content. This makes sense in the context of a larger advertising business, because the huge chunk of users who never post do see ads, but to the extent that Twitter gives a meaningful visibility boost to bluechecks the more it will deter those who don’t pay from posting, even as the price for Twitter Blue needs to be relatively high because it only appeals to a minority of users. A subscription for access, on the other hand, could both be a lower price and thus be mostly borne by non-posters (because there are more of them). Again, this would significantly impair the advertising business, which is why it will probably never happen, but it sure would be interesting to see Musk try.

Apple Earnings

From the Wall Street Journal:

Apple Inc. reported record revenue in the September quarter, continuing a pandemic-fueled streak that investors have watched closely as demand for certain consumer goods has been sluggish. The Cupertino, Calif., company announced its full-year earnings on Thursday after markets closed. To date, Apple’s business has largely proved resilient as broader smartphone-sales slowdowns and global economic challenges have dragged down peers…

Growth slowed in Apple’s services business, an area some analysts say can point to slowing demand that may affect iPhone sales. Sales from services, which includes revenue from the App Store and Apple TV+, was $19.2 billion, up about 5% from the prior year but lower than year-over-year increases in previous quarters. Mr. Maestri said the services deceleration was due to effects of foreign exchange as well as slowdowns in digital advertising and gaming.

There’s not a ton to say about Apple’s results other than to admire how impressive they are: it turns out it really pays to build the most essential products in people’s lives!

What I did want to note was the Services revenue: the slowdowns in advertising and gaming were expected for all of the reasons discussed in last week’s Update about Google’s earnings. Indeed, the expectation is that Apple’s slowdown would be worse than Google’s because of App Tracking Transparency hitting games particularly hard.

That, though, is why I actually found 5% growth to be really impressive. Remember, Google Play revenues were down year-over-year, and while it is possible that Android customers are more impacted by the economic slowdown than iPhone customers are, that should be more than offset by the aforementioned ATT impact. What this increase says to me is that Apple’s ecosystem is much broader than games, and that CFO Luca Maestri has been reciting the company’s overall subscription numbers — now over 900 million — for a reason. Those are stickier than gaming in-app purchases, and clearly much more prevalent on iOS than on Android — and you can understand why Apple continue to fight so hard to ensure they all continue to utilize the App Store’s own subscription mechanism.

Or, to put it another way, I can imagine Apple cheering for a Twitter subscription business model more than anyone!

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