The Capital Note

Life after Twitter

(Dado Ruvic/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: a new social-network protocol, Jim Simons retires, Tesla in China, and the Twitter activist campaign that wasn’t. To sign up for the Capital Note, follow this link.

Platforms vs. Protocols

Twitter CEO Jack Dorsey posted a long thread yesterday explaining his company’s decision to ban Donald Trump. “I do not celebrate or feel pride in” the decision, he noted, but Twitter “faced an extraordinary and untenable circumstance, forcing us to focus all of our actions on public safety.”

Dorsey expresses borderline regret about the decision but seems to have capitulated to the reality that an Internet run by a handful of large corporations will tend toward censorship and other forms of control. First, the content policies of large social networks are quasi-democratic. If one side wants censorship and the other doesn’t, the company must assess the two options according to how much revenue it will lose in either scenario.

Second, large digital platforms are easy targets for regulators. While it’s tempting to see tech CEOs as overlords, keep in mind that they are making decisions largely at the behest of politicians. The Democrats won the election, and they hold the reins of a vast regulatory apparatus. While the Capitol riots were the proximate catalyst for the deplatforming of Trump and a handful of companies, it is no coincidence that they came in the wake of Democratic victories in Georgia’s Senate runoff.

So Dorsey, who in many ways embodies the cypherpunk dream of a free and open Internet, now finds himself in the unlikely role of Censor in Chief, as I wrote earlier this week:

A yogi with a nose ring and an impossibly long beard, Dorsey spent his youth writing emo poetry under the pen name JakDaemon. (“In the beginning, there was Jack. And Jack had a groove.”) His resume described him as a “grassroots hacker,” living in a “chaotic cruise of crypto anarchy, pseudonym federations, 4AM hacks, viral dispatch, reputation taggers, temporary autonomous zones, colony/clan workforces, urban cores, and corporate disorder.”

His Twitter bio, which reads “#Bitcoin,” is a testament to his commitment to a decentralized payments system. In recent days, Dorsey has also used his Twitter account to promote Signal, an encrypted messaging app with the explicit goal of resisting censorship. Meanwhile, in his capacity as CEO of payments company Square, Dorsey is lobbying against cryptocurrency regulations proposed by FinCEN. Square’s statement on the proposed regulation argued that “people should have the ability to participate in financial systems easily and equitably.”

But Dorsey has a trick up his sleeve. In the aforementioned Twitter thread, he pointed to a new venture called Blue Sky, described as “an open decentralized standard for social media.” While there’s little published information about Blue Sky, it appears to be a blockchain-based protocol for social networking.

In a primer called “Protocols not Platforms” (worth reading in full), tech blogger Mike Masnick explains:

The early internet involved many different protocols — instructions and standards that anyone could then use to build a compatible interface. Email used SMTP (Simple Mail Transfer Protocol). Chat was done over IRC (Internet Relay Chat). Usenet served as a distributed discussion system using NNTP (Network News Transfer Protocol). The World Wide Web itself was its own protocol: HyperText Transfer Protocol, or HTTP.

In the past few decades, however, rather than building new protocols, the internet has grown up around controlled platforms that are privately owned. These can function in ways that appear similar to the earlier protocols, but they are controlled by a single entity. This has happened for a variety of reasons. Obviously, a single entity controlling a platform can then profit off of it. In addition, having a single entity can often mean that new features, upgrades, bug fixes, and the like can be rolled out much more quickly, in ways that would increase the user base.

Think of a protocol as the procedure you follow for mailing a letter or package. You put the recipient’s name, address, city, state, and zip code on the envelope, and put it in a mailbox. Similarly, network protocols are essentially widely adopted ways of transmitting data between users. The platform, on the other hand, is like the postal service (or FedEx, UPS, etc.).

Because of the “winner takes all” features of the digital economy, new social networks will have trouble competing with dominant incumbents such as Facebook and Twitter. Perhaps the way out isn’t new social networks, but a new Internet altogether.

Around the Web

Hedge-fund legend Jim Simons retires as chairman of Renaissance Technologies:

“I believe it is time: this transition has been many years in the making, and Peter Brown, our incoming chairman, is more than ready to take on the responsibility,” Mr Simons said in a statement. The move comes at a difficult time for Renaissance, which has struggled to navigate the market volatility since the coronavirus pandemic began. Its Renaissance Institutional Equities Fund ended 2020 down close to 20 per cent, while its Renaissance Institutional Diversified Alpha declined by 31 per cent, according to people close to the firm.

Michael Strain cautions Biden against demanding too much in stimulus negotiations:

The biggest problem with what’s known about Biden’s coming proposal is his plan to increase the generosity of the direct checks to individuals passed last month from $600 to $2,000.

These checks would be less generous for higher-income people. But many would still go to households with six-figure incomes, and some would even go to families earning more than $300,000 per year. Moreover, the checks are designed to go to all households with income below a cap, including those that did not experience employment loss.

The promise and perils of Tesla’s China business:

Early in 2019, Musk and a host of dignitaries gathered by a muddy field in the Lingang New Area, a development zone an hour and a half’s drive from the center of Shanghai. Taking the stage behind a white, Tesla-branded lectern, he marked the occasion with characteristic hyperbole. The factory the company was breaking ground on, he said, would be “perhaps the most advanced” on the planet. What was more, “we think, with the resources here, that we can build the Shanghai Gigafactory in record time.”

He then went to Beijing, his every move tracked on social media by Chinese fans, many of whom were charmed by his decision to dine at one of the city’s better-known hot pot restaurants. The highlight of the trip was an audience with Premier Li Keqiang. “I love China,” Musk said as they met, providing a soundbite that would be distributed enthusiastically by state media. It quickly became clear that China loved him back, and not only because Li replied that Musk might be granted permanent residence.

Random Walk

I’ve been thinking a lot recently about Elliott Management’s activist campaign against Twitter. Earlier this year, the fund took a stake in Twitter and attempted to remove Dorsey, arguing that his role as CEO of Square posed a conflict of interest:

Mr. Dorsey splits his time between Twitter and Square Inc., a financial technology company he also co-founded and that he also serves as CEO. His split duties have raised questions about his ability to suitably focus on the issues facing Twitter, where he’s often been a more hands-off leader than some of his peers around Silicon Valley.

As always, nothing some share buybacks can’t fix:

Twitter and Elliott reached an agreement in March in which the company agreed to appoint two board members and commit to $2 billion in share buybacks. The agreement also included the formation of the new committee to study Twitter’s leadership, which effectively created a probation period for Mr. Dorsey to prove himself to the new investors.

The committee was led by Patrick Pichette, Google’s former chief financial officer who earlier this year was named Twitter’s lead independent director. Jesse Cohn, Elliott’s head of U.S. equity activism, and Egon Durban, co-CEO and managing partner of Silver Lake, also served on the committee.

The timing of Elliott’s withdrawal from Twitter — right around the beginning of the COVID-19 panic — leads me to suspect that the campaign might have ended differently under different circumstances. Indeed, Dorsey’s stake in Square is worth about 14 times as much as his share in Twitter. And Square, whose largest revenue segment is Bitcoin trading (albeit at low margins), is in some ways the antithesis of Twitter: Its business model depends on increasing decentralizing of the banking system.

If I were inclined to concoct conspiracy theories, I might even suspect Dorsey is deliberately sabotaging Twitter to strengthen Square.

— D.T.

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