Big Tech Bloat and Efficient Markets

Why hasn't the invisible hand trimmed the fat from Twitter?

The recent Elon-Twitter saga raises a number of questions about bigtechs, competition, and corporate governance. Elon thinks that Twitter is run with a lot of bloat, and seems to be walking into betting $53 billion USD that he can fire 80% of Twitter and keep the product alive. Does the premise of Elon’s bet make any sense? How, conceivably, could Twitter have possibly been run in such an inefficient way, in competitive free-entry markets? Why don’t standard market forces make bigtechs set prices at marginal cost and fire any unnecessary workers, like they do in other industries?

If you accept the premise, here is my attempt at an explanation.

Bigtechs — Google, Facebook, Twitter, and the like — were uniquely positioned to run in a stupidly inefficient way over the last decade, because they were basically insulated from competitive pressure forcing them to become more efficient. This is basically from combination of two forces.

The first is market power in product markets. United Airlines has to run its ops efficiently, because it faces 4 other big airlines trying to do exactly the same thing, and making slim margins. If they don't trim the fat, they lose money on every flight. Bigtechs don't face the same competitive pressures in product markets, because they run natural monopoly businesses. They occasionally take potshots at each other within their fortresses (Google+, IG stories, etc.) but largely they can charge dumb margins that don’t get competed down, because from a product market perspective, each bigtech lives in a siloed fortress of network effects which is quite difficult to compete down.

However, a business having market power in product markets is not a sufficient condition for it to run inefficiently. If a business is effectively a pot of rents, there is still usually competitive pressure from capital markets to distribute the rents to investors!

Business execs have incentives to run their businesses to make themselves happy, build empires, do weird ESG stuff, and so on. But usually when they do this, investors start knocking on their doors and make them cut this out, or fire them. Pots of rents from natural monopolies exist in industries other than bigtech. But capital markets like to force the corporate organization around pots of rents to become slim, focused machines for capturing rents and redistributing profits to investors. So why doesn't capital-market pressure from PEs, hostile takeovers, discipline big tech inefficiency the way they do in other markets?

This is a bit more complicated than product markets, but we might think of a few reasons why capital market pressures on bigtechs were muted over the past decade or so:

1. The high prevalence of founder/exec-favored, rather than capital-favored, governance structures in bigtech, such as dual class shares.

2. The general culture of a "cult of personality" around the OG execs, the "founder knows best" mindset, creating public/cultural pressure around hostile takeovers (remember what happened when Jobs was ousted from Apple?)

3. The general high level of tech stock prices. If the market overvalues tech to begin with — somebody out there is willing to hold a very inefficient company at a price that doesn't reflect how inefficient it is — this dramatically reduces potential profits from a hostile takeover.

So, one could spin a narrative where the combination of structurally low competition in product markets, and various factors contributing to low pressures from capital markets, make corp executive moral hazard frictions particularly severe in bigtech. Big CEOs run their empires quite inefficiently, and there’s not much anyone could do about it over the past decade.

What is interesting is that, on the capital markets side at least, the factors driving bigtech to face low pressure from capital markets may not last forever. Tech prices have come down. Charismatic founder CEOs are retiring, and the “cult of personality” around them is decaying. Cracks are starting to appear in the walls of the seemingly unassailable fortresses of bigtech governance.

Suppose, for example, that Elon succeeds in showing the world that, indeed, Twitter can be run with 10-20% of its original headcount, functionally, and maintaining its cashflows at a fairly stable level. Could this spark a giant hostile takeover wave in bigtech? PEs and activist investors might line up to buy out tech companies, fire their CEOs, bring in the BCG guys, and line up the SWEs in order of the number of lines of code they’ve written and fire the bottom 90%, in every big tech, all at once.

This is, of course, science fiction, but is it totally implausible? Most big companies were at one point the media darlings of their day. Inevitably, one day, the role that Google, Facebook, Twitter play in our collective consciousness will be little different from the role played by Kraft Foods, Home Depot, Amtrak. It is only a matter of how soon that day will come.