A bit over a year ago Elon Musk bought twitter, and on his first day in the office replaced all of the plumbing fixtures, which I am told is an ancient Musk family tradition – its origins are lost to time. That’s not all he changed, he changed the branding of the company to X, laid off eighty percent of the staff, replaced the content moderation system with a crowd sourced community notes system and added paid verification checkmarks to replace the legacy system.
Musk reinstated a number of previously banned accounts and claimed to take a more “free speech” approach on the platform, mostly only suspending accounts that criticized or made fun of him personally.
On Wednesday this week Musk lost his cool in an interview with Andrew Ross Sorkin (who he calls Jonathan) [clip] He said that the advertisers that stopped spending on the platform due to his endorsement of an antisemitic post can “funk” themselves. Here is the clip.
Andrew – or Jonathan Ross Sorkin as I now call him asked if Musk’s behavior would kill the company and this is how he responded. [Clip]
This all came about because earlier this month, Musk, responded to an antisemitic tweet, saying that it was the “actual truth”. During the interview with “Jonathan” Musk apologized for his tweet, calling it “perhaps one of the most foolish, if not the most foolish, things he had ever done on the platform”. He also rejected the accusations that he was antisemitic and insisted he had been misunderstood.
IBM, Apple, Walt Disney, Comcast, Paramount, Lionsgate, Sony Pictures and Warner Brothers have all paused their advertising spending on Twitter due to this controversy, worried that their adverts might be shown next to controversial and inappropriate content. Many of these companies stopped posting on Twitter too in the wake of this scandal to avoid damaging their brands. There are reports in the press that they are unlikely to return having been burned a few times on Twitter.
This is not unlike what happened on YouTube in 2018 when a much beloved children’s entertainer and crypto scammer filmed a controversial video in Japan which led advertisers to reconsider advertising on YouTube. YouTube had to enact new advertiser friendly policies to deal with this.
The non-profit company Media Matters reported adverts for top brands on Twitter next to posts touting pro-Nazi and white nationalist content. Twitter is suing Media Matters, claiming that it was deliberately leading a “smear campaign” against the platform.
The companies that cancelled their advertising spending were all amongst the largest spenders on Twitter, according to Sensor Tower data. Given that all of these large brands have stopped advertising on Twitter or even using the platform at all, the company is now under pressure to both sell additional ad space to smaller advertisers and to retain other large advertisers to sustain revenue.
Twitter was not a great business last year when Elon Musk bought it, today it is saddled with debt, its revenues have collapsed, and it has much lower engagement than before. Elon Musk does have some ideas for turning it around, so let’s discuss if Twitter is likely to go bankrupt and what might happen in the event of its bankruptcy.
In April 2022 Elon Musk announced his intention to buy Twitter which many people thought was possibly a joke at the time. Elon has a long history of pretending to do mergers and acquisitions, (usually at prices like 420 dollars or 69 dollars) so at the time there was no good reason to take his offer seriously. He then secured financing for the deal, signed a binding merger agreement and only then tried to back out of the deal. Unfortunately, the joke was on Elon this time. He was forced to make the purchase and sued the law firm who had done their job by forcing him to complete the deal. I made around three videos on this topic at the time.
Elon pledged to provide $46.5 billion in equity and debt financing for the acquisition, which covered the $44 billion dollar price tag and the closing and legal costs. About 60% of this money came from Musk as he managed to sell a lot of his Tesla stock near the all-time-high. Banks, including Morgan Stanley and Bank of America, committed to provide $13 billion in debt financing – which they initially planned to sell on to investors. People like Jack Dorsey, Larry Ellison, Sequoia Capital, Fidelity and the noted free speech absolutist Prince Alwaleed Bin Talal Al Saud put in the remaining seven billion dollars.
Twitter was never a very profitable company. It lost money every year since its founding other than in 2018 and 2019. In 2021, before being purchased, Twitter had made 5.1 billion dollars in revenue, pretty much all of which came from advertising. The company would have been profitable that year except for having settled an 805-million-dollar shareholder lawsuit, so they ended up losing around 200 million dollars that year.
Usually, investors don’t like to lend money to businesses like this and that is why Musk’s 13-billion-dollar loan came with an 11.75% percent interest rate – this was at a time when interest rates were close to zero. The loan added just over 1.5 billion dollars in interest rate expense to the company, which is more than it made in 2019, its most profitable year ever.
Straight away, Musk needed to increase cashflow by 1.5 billion dollars in order to be able to service the loan. That is not what happened. With all of his talk of getting rid of content moderation, over 500 advertisers paused spending on Twitter, taking a wait and see approach. This caused the company’s daily revenues to fall by 40% compared to the prior year according to Reuters.
Advertisers are under no obligation to advertise on any platform, and they make their spending decisions based on how likely an advert is to make a sale and are careful to avoid anything that might harm their brand which often took decades to build up.
From the very start, personnel costs have consistently been Twitter’s most significant expense, with salaries being paid to around 7,500 employees. When Musk took over, he laid off around 80% of the staff, stopped paying rent on office space, and closed down one of the company’s three data centers.
Because Twitter is now a private company, it no longer publishes financial statements, so it’s not easy to know what cash flows look like today, but we can gather some information from announcements made by Investors like Fidelity who have been writing down the value of their private investment and from Musk’s occasional statements to the media. [half]
This April Musk did an interview with the BBC where he discussed what the numbers looked like. [BBC Clip] Using these numbers Twitter was on track to lose three billion dollars in 2023. In the same interview Musk claimed that many of the advertisers had since returned to the platform. [BBC Clip2] and he went on to say [BBC Clip3 Cashflow]. He was much more positive back then, about advertising [BBC4].
Three months later Musk tweeted “we are still negative cash flow due to an approximately 50% drop in advertising plus heavy debt load.” It is hard to know how to compare these contrasting statements – but maybe a lot of advertisers had returned to Twitter but were spending a lot less on advertising.
Twitter Ad Sales staff told The New York Times around the same time that they were struggling to sell advertising as advertisers were concerned about inappropriate content on twitter and their adverts being on the same platform as low-end products. The salespeople said that advertising sales were down by 56%.
Fidelity who invested in the deal alongside Musk had marked down the value of their stake in the company by 65% as of September. They may have to write it down again before year end. By their estimate, the entire company was worth 15 billion dollars at that point in time. This decline was not industry wide. Facebook is up 160% in 2023
One of Musk’s big plans to increase revenue and reduce dependance on advertisers was to start charging for twitter verification. A month after taking control Musk announced that he would be charging $8 per month for verification. Twitter had initially introduced verification in 2009 in response to celebrity a lawsuit. They verified big accounts by putting a blue tick next to prevent fraudulent activities on the platform. The whole purpose of verification was to prevent lawsuits.
Over the years people had expressed frustration over the way the verification system worked, it had become more of a status symbol than anything else and was occasionally taken away from people as punishment for bad behavior on the platform – which didn’t really make any sense.
The roll out of Elons $8 blue ticks was a total disaster. In the first few days, scammers began pretending to be corporate users or famous individuals by using the new Twitter Blue paid option. On November 10th, an account pretending to be Eli Lilly’s corporate account tweeted: “We are excited to announce insulin is free now.” It took the newly understaffed Twitter six hours to remove the fake tweet which got retweeted thousands of times. Lilly’s stock fell 6% that day, wiping 15 billion dollars from its market cap.
Eli Lilly who had been a big advertiser on Twitter pulled their advertising immediately. An Eli Lilly official told The Washington Post that “For $8, Twitter is ‘losing out on millions of dollars in ad revenue.”
Coca Cola, McDonalds, Nintendo, BP, Nestle, Lockheed Martin and even Tesla fell victim to $8 blue tick impersonators. Elon’s tirade at the New York Times Deal book Summit this week may not have been entirely necessary. [clip] Advertisers are possibly already well aware of how Elon feels about them.
Around 300 thousand people appear to subscribe to twitter blue meaning that the platform earns less than 2.5 million dollars per month from the service, which doesn’t do much to make up for the lost advertising revenue.
Politicians and celebrities were impersonated too. The system allowed a fake account verified by Twitter Blue to pose as a Sudanese official and falsely report the death of a military leader during an active military conflict.
Celebrities – it turned out - were unwilling to enroll in a program designed to convey status that anyone with $8 could sign up for, so most of the people who signed up for twitter blue were accounts with less than 1,000 followers and there are close to 3000 Twitter Blue subscribers paying $8 per month who have zero followers.
On the day when the legacy blue ticks disappeared, famous users like Stephen King and Jason Alexander began reporting having the blue check mark without having paid for it nor wanting it.
Musk later confirmed that he was personally paying for Twitter Blue subscriptions for a list of celebrities all of whom had dismissed the idea of paying for Twitter.
In Rap News - (which in truth is the main focus of this channel) – The rapper Doja Cat tweeted upon losing her legacy blue tick that if you have a blue check then you're a “complete loser.”
Other people who were vocal Elon Musk supporters bought blue ticks to support the platform.
Quite a few long term Twitter users were annoyed with the “For You” (algorithmic feed) introduced under Musk, with many complaining that the recommended tweets shown in “For You” were not relevant to their interests. While you could switch to the following tab – every time you reopened twitter it brought you to the algorithmic feed.
For people who used Twitter as a news feed, it became totally useless as it was often showing you tweets from people you don’t follow from days ago.
The worst thing about Twitter Blue is that it boosts the tweets of paid users, rather than tweets that people actually find interesting. Every time people logged in they found themselves reading tweets from strangers they were not interested in who had paid to be boosted.
Presenting users with content that they don’t find interesting is a terrible user experience.
It is worth noting that as bad as many of these decisions were – other social media platforms watched how things worked out with Twitter and then borrowed some of the ideas, such as laying off a lot of their content moderation staff and charging for verification and boosting – but with a more careful roll out.
A number of other microblogging sites do of course exist, and many users have migrated to other platforms, but none have really gained a lot of traction.
Linda Yaccarino the new CEO of Twitter was recently interviewed at the Vox Code conference. She seemed a little bit flustered – as she only realized that she was wearing her suit inside out when she was on the stage – and I think we have all had nightmares like that. She claimed in an interview that engagement had increased at Twitter under Musks ownership. [CLIP] Unfortunately, that is not what the data shows. The research firm Sensor Tower shows that daily active users have fallen 16%. App download data shows that the company is experiencing its lowest download rates in over a decade with a nearly 30% decrease since July, when Musk decided to rename the company x. It appears that people have just lost interest in Twitter. While I have an account I hardly ever log in anymore.
Elon Musk has many ideas about how he will monetize twitter- it’s not all just $8 blue ticks. [clip] The new York post reports that Musk has given his staff a year to get that up and running. 2024 is likely to be a very big year for Elon Musk.[Clip]
Now turning a microblogging site into half of the worlds financial system would be quite a big deal. If every single financial transaction in The United States, Europe and China were done on the app – that would bring you to about 49% of the worlds financial system. Let’s never accuse Elon of lacking in ambition.
In many ways – if building a payments system was his plan - he should have started by buying a bank, hopefully once his CEO Linda turns her suit out the right way, her background in European, American and Chinese payments systems and financial regulation will start to pay off. Oh wait, no… Her background is in advertising sales… Maybe Jack Dorsey and Jay Z will be able help him out… They’ve got that Bitcoin Academy thing…
Now, Musk’s idea of X as a payment system is an idea he came up with entirely on his own – the fact that it sounds a lot like Ali Pay and We Chat pay which are widely used in China is a mere coincidence.
Payment apps took off in China, not because they are a great way pf making payments, but because China had a stodgy state dominated banking system where it was extremely difficult to get anything done at all. Credit cards never took off in China. The country skipped over a generation of finance and went straight to smartphone-based digital payments.
Similar payment methods already exist in the rest of the world – things like Apple Pay and Google Pay, but only 12% of in store transactions in the United States use these apps which are built into almost every smart phone, because Americans and Europeans prefer using Credit and Debit cards.
I can’t see why anyone would decide to use the eighteenth most popular social network for payments when they already have a tap to pay app built into their phone which they choose not to use.
On a side note, I’m not sure if people would trust Twitter with their savings when the company won’t even pay its own office rent.
Earlier this year Twitter announced that they would begin sharing ad revenue with content creators on its platform, but the offer wouldn’t apply to all creators. You would have to pay Twitter $8 per month for twitter blue, and then there was a chance that they would pay you more than $8 for the valuable content you create on the platform. There is nothing Ponzi like about that structure – a company that is unable to generate ad revenue itself paying people for the ads that run under their tweets… But only if you pay into the platform first.
There has been a lot of hype around AI this year, so Elon Musk recently announced the formation of xAI, a competitor to OpenAI with ambitions to “understand the true nature of the universe.” A few weeks ago, Musk announced that xAI had been folded into X (which is what he now calls twitter) and that its first product, a chatbot called Grok, is ready for testing. It is hard to know if this is valuable or not. XAI was founded in mid-July. If these things can be coded up in four months by a skeleton staff at a failing social media company – we might see a lot more of them appearing rather soon.
Twitter does not appear to be doing awfully well as a company, and it seems unlikely to me that Elon’s recent tirade will do much to improve its reputation with advertisers. While everyone thinks of Elon Musk as the sole owner of Twitter – there are actually other investors who can only be so happy with him burning the business to the ground. It’s not reasonable to ask your friends to invest in your company and then behave like this.
The banks who lent 13 billion dollars for the purchase of Twitter – initially planned on selling that debt to credit funds but found themselves unable to sell it after all of the shenanigans around the purchase last year. At the time it was reported that investors were only willing to pay 60 cents on the dollar for the 11.75% debt.
I imagine at this point they would probably be happy to sell that debt at 50 cents on the dollar if anyone was willing to take it off their hands. If twitter is unable to make the 1.5-billion-dollar interest payments in the coming years, the company would go bankrupt and be owned by the lenders. Who knows, maybe the banks will own twitter and turn it into a payment’s app… So far, Musk has not indicated whether he would put any further money into the business or not.
[clip]
As Jonathan said – Musk does have the resources to continue funding Twitter. Tesla shares are up 120% this year. The shares he owns have increased in value by 30 billion dollars over that period – if he wanted to, he could sell more of his tesla shares, buy back the debt at fifty cents on the dollar, maybe even buy out the other equity investors and in no time at all control maybe half of the global financial system.
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