To Elon Musk, Twitter is a Critical Supplier

Elon Musk yesterday disclosed he bought a large stake in Twitter. To Musk, Twitter supplies an audience and attention. Losing these would be a significant setback to Musk’s projects.

A business that’s reliant on a single supplier of key inputs will over the long term see that supplier increasingly set the terms of the relationship. [0]

• Restaurateurs face this problem from landlords, who supply location.
• Cable television network operators face this problem from TV stations, who supply content. Some of this content is highly differentiated.
• Spotify faces this problem from record labels and artists, who supply the rights to distribute their music.
• Apple used to face this problem from Intel, which until recently supplied it with microprocessors.

Twitter, worth $41 billion and a chronic underperformer, is not interesting in financial terms to somebody with Musk’s net worth of $270 billion. Twitter’s business is small ball. It has consistently underperformed as an asset, likely for fundamental reasons built into its experience and business model. [1]

Instead, Elon Musk relies on energizing and reaching an audience he can rally around his vision and projects. Twitter is a low-profit but irreplaceable way to reach and engage that audience. If you had Musk’s resources and his reliance on the service, you would also buy a sizeable piece of it.

Twitter is far more valuable to Musk as a supplier of audience and reach than as a business.

Notes:

[0] See my post on why Facebook will always be more profitable than Spotify, why Spotify bet on podcasts, and the concept of wholesale transfer pricing.

[1] Some social media properties manage to build strong engagement but can’t manage to do anything interesting with that engagement. A good example of this was what happened to Tumblr.