Trump creates a strategy problem for Twitter

Multi-sided platforms like Twitter create value for each user by adding more users. However, some users have more impact than others. While former President Trump would likely increase Twitter’s business, audience, and market value, he could also hold Twitter hostage.

[Author’s note: this article is not about politics. I am an economics professor, focusing on multi-sided platform marketplaces. This article is about economic theory.]

Let’s start with a comparison between YouTube and Twitter. Beyoncé’s music video, Single Ladies, has been viewed 8,880,000 times on YouTube. Obviously, many people got a lot of enjoyment and value out of watching it. And that’s how platforms work. More suppliers (for YouTube, these are content producers) offer a greater variety of goods and services which, in turn, attract more buyers (for YouTube, these are viewers). The aggregation of buyers then attracts more supplies. This is called the network effect, where the value of the platform for each person is directly related to the number of other people on the platform. The network effect is responsible for the accelerated and exponential growth that many platforms have achieved over the past 10 years.

In its simplest form, the network effect treats all users equally. But clearly they are not. Some add more value – as suppliers or buyers – than others. In a 2019 Harvard Business Review article titled “Why Some Platforms Thrive and Others Don’t,” Feng Zhu and Marco Iansiti distinguished between a weak network effect and a strong network effect, and their findings are startling.

A mature platform company with a strong network effect has many users who make roughly equal contributions. If only one buyer or supplier leaves, the value for all other users is not significantly reduced. Despite Beyonce’s contributions, YouTube has thousands of contributors with views racking up in the millions.

A weak network effect, on the other hand, has some superstars contributing more than others. If one of them leaves, the drop in value for each user could be significant. Just as the network effect can fuel rapid growth, it can also herald rapid decline. So the departure of a few superstars could cause the market to collapse as the herd recedes.

Twitter is not yet mature. It has no stable revenues or costs and has not yet made a profit. This puts Elon Musk, the new CEO of Twitter, in a bind. If he allows a popular figure on the platform who would get a lot of attention (positive or negative) like former President Trump, he will drive activity and audience growth. But it will also go from a strong network effect to a weak network effect, indebted to these few major attractions. If they leave, the viewership – and the platform’s revenue – will decline. This reality could also complicate decisions to eject (again) a major contributor from the platform for fear of a market crash.

Since yesterday, Mr. Musk has chosen to allow Mr. Trump to return to Twitter. And to date, Mr. Trump has yet to participate with a tweet. The next chapter will be instructive for platform entrepreneurs and platform theory.

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