#2 Reimagining Twitter - An Economic Outlook, and Scenario Planning through Game Theory
Going beyond the product, shifting perspectives from Twitter the social media platform to Twitter, the business.
TL;DR: Twitter has been an integral part of the social media movement in the last decade. The core principles of reducing turnaround times of 140/280 character user-generated content have opened up new windows of collectivising communication and generating social movement. It has provided safe and collaborative voices to people, as well as a forum for leaders and celebrities to build their brand and influence through predominantly written content and messaging. In light of the recent tussle between the social media giant and the Government of India regarding the new regulatory policy, I wanted to explore the economic outlook of Twitter, the key differentiators of business models and value drivers, and evaluate the likelihood of various potential scenarios that might happen in the coming weeks from the lens of Nash equilibrium.
Meta (Thought process behind the thinking that went into writing this)
I wanted to approach the current narrative of Twitter vs Government from an alternate lens, moving away from the "social-media" argument to some fundamental business principles and economic drivers. I intended to take a peek below the surface of advertisement based revenue models of social media, and potentially explore the flywheel for Twitter. I also wanted to explore the game theory aspect of strategic decision making, adding a layer of game theory by evaluating various potential scenarios for Twitter using Nash Equilibrium.
Introduction:
Twitter Inc is a testament to the sheer scalability of platform-based economics and the power of user-generated content publishing in the world. Started in 2006 by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams (who I consider to be one of the pioneers of user-generated content sharing through the internet in the world) as an SMS-based micro-blogging service, it has transformed into an influential social media superpower. At the end of December 2020, Twitter reports having an Average monetizable daily active usage (mDAU) was 192 million for the three months ended December 31, 2020, an increase of 27% year over year. The company captures the essence of their primary product through the following paragraph in its 10k filing of 2020.
Our primary product, Twitter, is a global platform for public self-expression and conversation in real time. Twitter allows people to consume, create, distribute and discover content and has democratized content creation and distribution.
Through Topics, Interests, and Trends, we help people discover what’s happening live. We also continue to implement live broadcasts and on-demand video content across Twitter, including through partnerships with media outlets and our platform partners.
Media outlets and our platform partners also help extend the reach of Twitter content by distributing Tweets beyond our products to complement their content.
People can also express themselves using creation tools like Voice Tweets and Fleets, which allows everyone to start conversations in a new way – with their voice or with their fleeting thoughts using text, reactions to Tweets, photos or videos.
Having said this, I wish to provide an alternative view of Twitter not as a product, but as a company, the probable scenarios to the impending decisions by the Government based on the fresh IT rules, and how can we reimagine Twitter not just as a platform, but as a company.
Current Context: Twitter vs Government of India
The Information Technology (Guidelines For Intermediaries And Digital Media Ethics Code) Rules, 2021 were notified on February 25th, 2021. The Rules lay down a new and stringent framework for the regulation of online content. Though categorised as ‘soft-touch, the Rules contain provisions that range from the claustrophobic to the downright stifling, with several implications for free speech, journalistic freedom, and artistic creativity.
That these Rules have been notified in the aftermath of the debacle involving Twitter and the Government of India has only exacerbated concerns that they are an attempt to clamp down on dissent. The Internet Freedom Foundation (IFF) team have written extensively about the Rules before through their deep dive into the Rules as well as their more historical and contextual analysis. The IFF team have also provided an explainer on the Self-regulatory Code of the Internet and Mobile Association of India to provide an instance of how self-censorship would work under the Rules.
Some of the major provisions under these rules that Twitter will have to comply with are:
Grievance Redressal: Twitter will be required to employ a Chief Compliance Officer, a Nodal officer, and a Resident Grievance Officer to cater to all the grievance redressal which will be raised by the government or any other user of Twitter.
Local Residence of Grievance Redressal Officers: All three officers aforementioned for Grievance Redressal in India are now legally required to be residing in India.
Turnaround time for Grievances: Twitter will be required to act on the grievance raised within 36 hours
Data Retention: Mandatory data retention for up to 180 days for investigative purposes.
End-to-End Encryption: Twitter must enable tracing of the originator of information on their platform if required by a court of competent jurisdiction or a competent authority under Section 69A of the IT Act [Rule 4(2)]
Twitter’s Response: Twitter expressed concerns over “recent events regarding its employees in India” and said it plans to advocate changes in core elements of the new IT Rules that inhibit free and open public conversation. It, however, had added that it will strive to comply with the revised IT laws in India but sought a minimum of a three-month extension of the compliance window.
"Twitter is deeply committed to the people of India. Our service has proven vital for the public conversation and a source of support for people during the pandemic. To keep our service available, we will strive to comply with applicable law in India. But, just as we do around the world, we will continue to be strictly guided by principles of transparency, a commitment to empowering every voice on the service, and protecting freedom of expression and privacy under the rule of law," a Twitter spokesperson said.
Government’s Response: In its response to the statement put out by Twitter, the government said Twitter refuses to comply with "those very regulations in the 'Intermediary Guidelines' on the basis of which it is claiming a safe harbour protection from any criminal liability in India". It termed Twitter's statement "unfortunate", totally baseless, false and an attempt to defame India to hide their own follies".
Twitter - Product vs Company, the underlying economics.
The key anchor to the entire debate is classifying Twitter as a significant social media intermediary. If we dive deep into the economics of Twitter and its business model, it is much more than a social media platform.
The business model of Twitter lies not in the monetisation of content on its platform, but the advertising revenues generated from users logging onto the platform every day.
Twitter has a dedicated set of userbase spread across multiple countries in the world. The USA has the largest base of users in the world (Over 68 million) followed by Japan (over 51 million). This accounts for 47.63% of user globally at the end of December 2020. In comparison, India has a user base of about 14.25% of the global cohort, about 1.89 Crores (18.9 million) users in 2021.
An interesting point raised by the Government’s response to Twitter was that a significant revenue of the company comes from India. That is far away from reality.
Based on the 10K filings by Twitter Inc with the SEC for the year ending in December 2020, the company face losses in its net income since 2018. The year 2020 ended with Twitter facing a loss of USD 1.13 Billion, a significant deviation from 2019 which saw the company net a profit of USD 1.46 Billion, a slight increase from the profits of 2018 being USD 1.2 Billion. The total revenue generated by Twitter at the end of 2020 was USD 3.7 Billion.
When taken in the context of India, the revenue generated by users in our country did not exceed USD 277 million, or INR 1958 Cr. This constitutes just 7.4% of Twitter’s entire revenue from India in 2020, which in itself is the highest in the last three years. The revenue generated per user (ARPU) in India by Twitter amounts to INR 1041 or USD 14 per user. This is higher than Facebook for the APAC region, which has an ARPU (average revenue per user) of USD 4.05. Kunal Shah, the founder of CRED in his tweet in July 2020 puts the value of Facebook ARPU as USD 2 per annum. This is particularly interesting as the total userbase of Facebook in India is 322 million, which is 17 times more than that of Twitter.
Putting all this in perspective, the crux of the matter is the distinction of looking at Twitter as a company with the business model of advertising channels for its user base. The reason it identifies itself as a social media platform first, and an advertising channel later is due to the user-retention flywheel of Twitter’s business.
The Twitter Flywheel
Popularised by Jim Collins, the Flywheel Effect is a representation of a systemic view of the various drivers to the momentum inducing company growth and long-term value.
It is the free-flowing increase in user-generated content (UGC) that leads to daily active users (DAU) on the platform. The important highlight is the word “Daily” which implies high customer retention. This is a key driver to a higher LTV (lifetime value) of the customer, which is defined by the average cash flow generated by the user for the platform over the due course of its time on the platform. An increase in DAUs on the platform increases the probability of monetizing them through advertisements. This in turn increases the number of advertisers on the platform thereby adding to Twitter’s revenue. This enables them to not only add new users but sustain the platform for its daily active users.
The Case for Twitter’s Free Speech Argument
It is important for us to understand the case of Twitter’s enhanced emphasis on free speech, the flurry of events since the Insurrection of January 6 and the response by Twitter to those activities, as well as Jack Dorsey’s responses to the senate hearings over the last couple of months to get a better understanding of Twitter’s response to the Indian Government regarding free speech.
Some of the key highlights by Twitter in its crusade to protect and preserve free speech and tackle disinformation includes some drastic steps taken by the company by banning some very high profile users (read Donald Trump) that had a material impact on the daily active users on the platform, as well as bringing in new safeguards against misinformation, fake news, controlled censorship, and enhanced privacy policy. All of this is due to the strong top-down leadership approach of Jack Dorsey protecting the integrity of the ability of users to generate and share content on the platform. Of all the potentially different ways of users generating content on Twitter, text-based formats are predominantly used by most users.
Twitter has seen its fair share of celebrities, business leaders, and world leaders in expanding its reach, connecting these high profile celebrities and leaders directly with the citizens, customers, and audiences, and having some deeper engagement with the audience which has not been possible through the other social media channels to the same extent.
The key difference is, Twitter focuses on the ability of its users to generate content on the platform and not the type of user-generated content. The key differentiator is the turnaround time of not just the user-generated content and the ability of the recipient to interact with the UGC.
Barring conflicts with its set community guidelines and content standards, Twitter does not care much about the type of UGC on its platform. Twitter believes in the fact that it is not a publisher of content, just a means of providing a safe space for users to publish content. In India this manifests into the following use-cases that in itself should be monetised by Twitter, although the company has never taken any step towards doing the same:
Engagement with Politicians and Civic Bodies on urgent issues: Starting with one of the earliest cases of a respite provided to a woman complaining about miscreants on the train journey by tagging the Central Government minister in a tweet, there has been an uptake in engagements with civic bodies by the citizens of India.
Validated Disaster Warnings: Be it the phenomenal work done in COVID response (linking people in need during the months of April and May with beds, oxygen cylinders, and critical response) or that of weather updates and warning for disaster relief and response, Twitter has been a go-to platform for people.
Customer Grievance Redressals by Companies: Companies get immediate customer feedback and response to their products and services from Twitter, and the platform forms an important channel for customer grievance redressal for a lot of companies.
News and Media Publishing: Tweets by ministers, and other important dignitaries often become the source of news and valid responses. The running joke in India is that Twitter is more popular in spreading the message of the Government than the Press Information Bureau.
None of these critical aspects is being monetised by Twitter. Only if Twitter had the agenda of being in the content moderation business, the justification for the need for Twitter to provide grievance redressal through the new IT Act rules would have been valid.
Side Note: Twitter is also the largest platform to not censor nudity in the UGC being posted and shared. Even this is not monetised, which might have the potential of a significant revenue stream, the way OnlyFans did.
Scenario Analysis of Potential Outcomes through Nash Equilibrium
I have always been fascinated by the life and work of John Nash, which made me an avid reader and follower of his work in Game Theory. I believe Nash Equilibrium has been one of the last original thoughts of the twentieth century, and its implications being multifold in multiple disciplines beyond Game Theory and Mathematics. I had a great opportunity to assist Bruce Phelps (Managing Director in PGIM’s Institutional Advisory & Solutions (IAS) group who had recently shifted from Barclays Capital/Lehman Brothers) in 2017 when he took a course at ISB titled “Economics of Strategy”. I did get to study and teach some practical applications of Game Theory and the economics of strategy development, and how Nash Equilibrium helps reach optimum outcomes for all parties involved in a situation.
Nash Equilibrium is a slightly complex topic. There is not simplified explanation that I can provide to break it down. However, the following might be a decent attempt in understanding the Nash Equilibrium
The central concept is the Nash equilibrium, roughly defined as a stable state in which no player can gain advantage through a unilateral change of strategy assuming the others do not change what they are doing.
In a Nash equilibrium, each player is assumed to know the equilibrium strategies of the other players and no player has anything to gain by changing only their own strategy.
There are about three possible scenarios which are possible:
Government drops the hammer on Twitter, and Twitter leaves India: The expected payoff for Government is huge in terms of setting a case for other social media platforms. But it has low utility for the Government as it not only loses face on the international stage and in front of the global media, it also eliminates one of the largest channels of dissemination of public information. As of Twitter, the revenues generated from India are a drop in the bucket for the company (7%). This will enable saving a lot of costs for the company in the short run but may prove to be folly in the long run. Potential for the scenario to actualise: Medium.
Twitter complies immediately with the rules set by the Government: This will mean a steady increase in costs for Twitter with a marginal increase in ad revenues for the company. This will prove disastrous for the bottom line of the company, as well as the ethos of Jack Dorsey and the senior leadership. The government will save face and be extolled amongst the followers. Potential for this scenario to actualise: Low to Medium.
Twitter shuts down the comments section of Tweets for users in Indias: Circumvents the definition of “significant social intermediary”. This hits the Twitter Flywheel adversely, however provides some semblance for the users to still engage with the platform. Government loses face, might penalise Twitter nonetheless. Potential for this scenario to actualise: Low.
Twitter partially complies with the IT rules: However, undertakes a different approach in the actual process of Grievance Redressal. This still affects the bottom line of the company and provides some assurances to the Government. Potential for this scenario to actualise: Medium to High. This is closest to the Nash Equilibrium.
Optimum Solution - Twitter complies with IT rules, however, Twitter then revises its business models and monetises functions like Grievance Redressals for companies, high subscription fees for government entities and ministers, news media and publishing etc. This has a long-term positive impact on Twitter’s revenue while offsetting the costs incurred in complying with the Government rules. The Government however then has no other option but to pay Twitter. This will be strongly opposed by users and companies alike, which will create adequate pressure by the Government to pull back from the IT rules.
Conclusion
The last section of this write-up notwithstanding, I wanted to highlight the advertisement revenue based business model of Twitter, the institutional flywheel of Twitter, and the key differentiation between Twitter and other social media platforms. Twitter has been a witness to the Arab Spring in 2011, the rise of fake news and disinformation since 2016, and the power of collectives in saving lives in India over the span of the last two months. Twitter as a company is much more valuable than the product and the business model. It is the ethos of the company that is steadfast in its approach towards providing a safe platform for people to provide UGC, and protect the free speech of users while underlying the “do-no-harm” policy of content moderation and user privacy. With the new IT rules coming in India, it is prudent for Twitter to change its business model and adopt stringent terms for users including the government entities and stakeholders using its platform. This might have a positive impact on its revenue and provide enough momentum for users to protest against the government to roll back the rules in the near future.
Please do reach out to me at aashir.sutar@gmail.com with your comments, feedback, and recommendations.