I think I know Elon's game ... maybe

I think I know Elon's game ... maybe

Updated: 27 days, 9 hours, 39 minutes, 47 seconds ago
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I’m a retired business professor and nothing about the Musk/Twitter acquisition seems to make even the slightest business sense. It’s still in the first week after the acquisition and Elon has managed to blow up Twitter and probably Tesla into the bargain. 

How are you supposed to handle this type of acquisition? First, make sure you understand the business. Then, make measured, strategic changes as quietly as possible. You break it, you (already) bought it. I’ve seen new CEO’s bring in a meatax, but that usually involved breaking a company into pieces and selling them off. Twitter doesn’t divide very well. Elon has access to good (probably great) business talent. What could possibly spook him so much that he would act this dumb? I have had a suspicion for a while, but his statement today about politics may seal the deal.

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To independent-minded voters:

Shared power curbs the worst excesses of both parties, therefore I recommend voting for a Republican Congress, given that the Presidency is Democratic.

— Elon Musk (@elonmusk) November 7, 2022

He’s seems to be afraid of some type of government action. What type of action? My guess is “regulation”, which actually makes sense if you consider his various businesses:

Tesla

Tesla is a bleeding edge technology in a century-old industry. Automaking is heavily regulated by virtually every government in the world. Safety. Insurance. Marketing practices. Design. … and did I say safety? Tesla is introducing driverless cars with horrendous safety liabilities. Great if they work, but some bad code could literally kill people. The US government is even now investigating Tesla’s self-driving Autopilot. It has already forced Tesla into several recalls.

And that is just in the US. Europe and Japan are likely to be even tougher.

Established car companies have huge departments that specialize in handling all aspects of government regulation for each of the countries they sell to. A GM, Daimler or Toyota knows exactly what it can and cannot do and who it must prove it to. 

In auto industry timeframes, Tesla is just getting up to speed on its designs and manufacturing and government regulators around the world are just beginning to catch on and catch up to the new EV tech challenges. Tesla is going to face a LOT bigger regulatory workload and its designers are going to be far more constrained than they’ve been so far.

Elon will hate that.

SpaceX and Starlink

SpaceX is NASA’s darling. It is also approaching the monopoly supplier of launch services worldwide. To Elon’s credit, he has built a launch capability that is cheaper than anything else, by a substantial margin. That amounts to a monopoly.

The US (and Europe) have had at least a century of experience in regulating monopoly businesses. They want to reward the entrepreneur for being so creative, but they want to protect the public from the monopolist’s raw market power. It’s not new and it’s not rocket science. 

As SpaceX gains launch gigs, regulation will loom on the horizon. There will be rules about who can launch satellites and who cannot, how much a launch can cost, how launch priorities  are determined. These rules will be imposed and Elon will have no choice but to comply.

Elon will hate that.

Starlink is another imminent monopoly, but regulations here could have an even deeper impact. Starlink is a global service. That makes it simultaneously harder to regulate and more certain to be regulated. Try to think of an American telecommunications industry or company that doesn’t have to comply with detailed federal regulation. I can’t. 

IMO, Elon’s biggest mistake this year was to demonstrate why Starlink needs to be regulated on a global basis. He started by making an applauded gift of Starlink base stations and services to Ukraine. That countered Russia’s efforts to destroy Ukraine’s communications infrastructure. Good deal. Then Elon started making noises that the Ukraine service was costing too much and he might have to shut it off. Remember, he didn’t have to offer the service in the first place, but when he did, threatening to shut it down over a billing issue is a big no no in regulated environments. You can’t just say it’s too costly … you have to prove it. 

This pricing controversy is exactly the kind of dispute that caused the US government to regulate many industries over the past century … for example, railroads, power companies and cable operators. They all have to follow standard pricing and reporting guidelines.

Sidebar:

Costs and pricing for services have been studied for a long time. From an accounting perspective, there are three factors to consider:

Most of Starlink’s costs are fixed and already “sunk”. The launches are done. The satellites are in orbit. Each satellite can handle a certain amount of traffic. SpaceX has already paid for that and it doesn’t cost them any more out of pocket to keep them flying or to have them send and receive signals. Accountants deal with fixed, sunk costs by assessing each user a fee to pay for part of it. That assessment, however is intended to “catch up” on already spent moneys. It is not tied to any new, out-of-pocket expenditures by Starlink. Any money Starlink gets from customers to help repay those sunk costs is a good thing. There may be costs specifically tied to Ukraine’s use for maintaining the service. Perhaps some extra people must monitor the traffic and manage the overflights. Perhaps an extra team must handle hacking from Russia. But those costs cannot be that much. A $million or two per month would be a stretch. If Starlink has a backlog of applicants who are waiting for service … and that service requires the same satellite capacity that Ukraine needs … then Starlink is giving up income by serving Ukraine. That is called an “opportunity cost” and it’s a legitimate cost to consider. It is not as real and immediate as an out-pocket-cost but it is more tangible than an accounting allocation of costs that have already been incurred. Whether it is real depends on whether there are any applicants that want the same satellites and bandwidth that the Ukrainians are using. If not, it is pretty hypothetical probably shouldn’t be quoted.

End Sidebar 

From Musk’s public statements, we can’t be sure what costs (or combination of costs) he is talking about with respect to Spacelink and Ukraine. If SpaceX were well regulated, its auditors would happily issue a letter attesting to the facts behind Musk’s claims. So far, no sign of any such letter.

As Spacelink goes forward, I believe it is inevitable that it will be faced with hard questions not just in the US, but worldwide. If it retains its dominant position (because it built a global network first), nations will clamor to find out why it is treating their citizens one way or another. Since near-earth orbit is sort of a limited public resource, I expect that new treaties will be hammered out over the next 5 to 10 years to make sure that the resource is used fairly. 

Starlink will end up being regulated by some global treaty or standard and Elon will hate that.

Twitter

That brings us to Twitter. Until now, it has been viewed as another online service. It’s role in the US election and the war in Ukraine and many other issues suggest it is becoming far more than that. In fact, Elon Musk wants to turn it into a global platform for the exchange of truth. 

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Twitter needs to become by far the most accurate source of information about the world. That’s our mission.

— Elon Musk (@elonmusk) November 7, 2022

If ever there was a statement showing that someone wants to create a monopoly, this has to be it. If Elon wants Twitter to achieve this status and become a monopoly … he has to expect that some government or collection of governments will insist that Twitter be closely regulated. The EU has already sent this signal.

As a global platform, Twitter will have to satisfy regulators in every economically significant country. India is giving itself the power to do that. Governments in Asia are concerned about Musk’s ownership plans. Worse, Twitter may have to meet different requirements in each country and market. Eventually, it may make more sense for Twitter to support some type of international standard or treaty … just so it can find one set of rules to follow.

Regardless, Elon will hate that.

Sidebar:

When people discuss “regulation” they typically think that some body (government, industry association, etc.) will oversee the company to ensure it doesn’t stray from its mission. Here, the term “regulation” means “keep under control”. For companies that are just trying to find their feet, this type of regulation makes demands that might make it harder to succeed.

There’s a second aspect of regulation that mainly economists consider. If regulations make companies follow a set of rules, then the ones that already comply have a competitive advantage over any new competitors. A prospective competitor must not only compete well, it must learn to comply with all the regulations that the existing companies handle routinely. That makes entering the market more costly. Regulation effectively protects the already-regulated companies from competition … preserving or increasing their profits. 

Hence regulation is a double-edged sword. It can be big brother controlling your actions and/or it can be a secret club that makes it hard for new members to join. Usually it starts as a control mechanism and morphs into the cozy club. So new companies usually hate regulation and established companies often love it.

End Sidebar

Elon Musk’s problem is that he has three companies that are the first-movers into markets that are shoo-ins to eventually be regulated. Since they aren’t comfortable yet, he hates regulations because they might limit his actions and threaten his success.

So what does he do? 

He seems to be trying to buy time the same way Trump and Putin and Kanye deal with their challenges. They create chaos by increasingly outrageous actions to distract and confuse their enemies. With his Twitter hijinks and the huge platform Twitter gives him, Elon might make an FCC chairman or NASA director or NTSB director pause before picking a fight. He might even confuse some foreign governments and slow their efforts to organize against him. Under that strategy, his appeal for electoral gridlock from the midterms makes total sense:

Shared power curbs the worst excesses of both parties, therefore I recommend voting for a Republican Congress, given that the Presidency is Democratic.

It would be one more way to slow or delay government scrutiny of his businesses. The “worst excesses” he fears may well be the prospect that Dark Brandon will lead a competent administration to delve into and clean up his regulatory situation. If Republicans win, there will be so much partisan infighting that he might escape for several more years. 

Is that his plan? I really don’t know, but it seems to fit. 

Will it work? I don’t know, but it has worked for others and it might work for him.

This diary will likely appear too late to have much influence, but it seems to me to be one more good reason to get out and vote!

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