The alarming economics of Twitter

Let’s set aside the debate over Elon Musk—his method, madness or politics. Twitter’s big problem lies in its balance sheet. This is the dismal state of its finances.

The bad deal: Let’s get real. Musk paid $44 billion for a company that was already overvalued—and is currently worth $41.09 billion. In its last quarterly earnings report before Musk bought it, the company posted a loss of $344 million. In fact, Twitter has not turned a profit for eight of the past 10 years.

The bad debt: In order to buy Twitter, Musk took $13 billion in loans. Last year, before he came along, the company paid $50 million in interest on loans. That amount has now ballooned to $1 billion a year. But Twitter’s operations only generated $630 million in cash flow in 2021. More importantly, its ‘free cash flow’—money available to pay creditors—was a negative $370 million. So it isn’t making enough money to cover those loan payments. The company did have $6 billion in cash—but most of that has likely gone toward the expenses of closing this long-drawn deal.

Investor pressure: To buy Twitter, Musk turned to a variety of investors—”more than 20 companies, venture firms, banks, and at least one Saudi prince.” A number of them are already experiencing buyer’s remorse—and it isn’t clear if all of them will honour their commitments. One of them told Business Insider last month, "We're all trying to get out of it, to be honest… We talked to the other investors, everyone's trying to get out of it, no one thinks the company should be valued at $44 billion." Their estimate of Twitter’s value: a measly $10-$12 billion.

Key point to note: Typically, investors are obliged to pay up if they commit a certain amount. But Musk cut his friends a unique deal—where he has the discretion to let them off the hook. Here’s the catch: "Given how unfavourable the deal now is for the buy-side, I'm sure Musk's buddies are all begging him to let them out. The less they put in, however, the more Musk himself must put in."

The ‘Tesla’ factor: Then there is the threat to Musk’s own personal wealth—and the value of his other vastly more valuable companies. Tesla’s shares have dropped by about 40% since Musk announced the deal to buy Twitter. Musk sold more than $8 billion in Tesla stock—and pledged another $12.5 billion as collateral for loans—tying Tesla’s value to Twitter’s:

“Any trouble at Twitter could force Mr Musk to draw on his stock in the electric carmaker he runs to plug potential holes. And any problem at Tesla that caused its stock to fall far enough could trigger clauses in Mr Musk’s personal loans that would require him to add more collateral, limiting his ability to invest in Twitter.”

Key point to note: Elon Musk has always insisted that he wasn’t motivated by money:

“This is not a way to make money…. Having a platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization. This is not about the economics at all.”

Now, other billionaires have made expensive purchases—purely for ideological or personal reasons. Examples: Jeff Bezos’ $250 million buyout of Washington Post or Marc Benioff’s $190 million acquisition of TIME magazine—but both were fully paid in cash. Musk, as you can see, doesn’t have that luxury.

What this all means: For all the heated debate over Musk’s grand plans for Twitter, the reality is this: “They are essentially going to take all the financial resources of the company and just pour it into servicing the debt.” This means the company has to do two things, and asap: slash its costs, make more money. And everything that Musk has done in the first week—good or bad—is all about meeting those two urgent goals. 

Editor’s note: We didn’t get into the cost-cutting angle—i.e the 50% layoffs announced on Friday—but there are good pieces on the subject in the reading list. 

Making money: Blue ticks and more

The blue tick drama: Musk’s first and most controversial move was to turn the prestigious verification badge into a paid perk. Starting this week, US users can pay $7.99 to pay for the Twitter Blue premium subscription—which entitles them to a blue tick. This will be rolled out in India later this month—and Musk has indicated that prices will be sensitive to local markets. 

The big problem #1: The feature was first introduced to prevent people from impersonating public figures, organisations and companies—everyone from Kim Kardashian to Kodak. But Musk’s version strips any connection to the original purpose.The software update simply declared: “Power to the people. Your account will get a blue check mark, just like the celebrities, companies, and politicians you already follow.” Typically, anyone applying for a blue tick has to undergo some kind of verification process. But according to the New York Times, Twitter Blue subscribers will “not need their identities authenticated to get the check mark”—which undermines the very notion of a ‘verified’ badge. Also this: the 423,000 accounts who have already been verified will lose their blue ticks if they don’t pay.

But, but, but: To his credit, Musk appears to have recognised part of this problem—after a number of handles with blue ticks impersonated him. Hours earlier, he tweeted: 

“Going forward, any Twitter handles engaging in impersonation without clearly specifying ‘parody’ will be permanently suspended. Previously, we issued a warning before suspension, but now that we are rolling out widespread verification, there will be no warning. This will be clearly identified as a condition for signing up to Twitter Blue. Any name change at all will cause temporary loss of verified checkmark.”

But it still isn’t clear whether there will be a verification process when a user signs up for a blue check.

The big problem #2: For all the hand-wringing over impersonation, many who already have the blue tick are just as worried about losing the social clout it signifies, as Kate Knibbs dryly notes in Wired: 

“For the mid-tier posters, the mid-career journalists, the pundits, pedants, and podcasters—well, any argument that we have the blue check solely to avoid imposters sounds as unbelievable as a trend-chasing hypebeast insisting that he only bought a Supreme-branded fire log to keep warm in the winter. Some of us enjoyed sitting behind the velvet rope; we also enjoyed insisting we were behind said rope for practical purposes. The pay model destroys that delusion.”

By turning the badge into an accoutrement that anyone can buy, Musk may have unintentionally destroyed its primary value. Or as Knibbs puts it: “What’s the point of paying for a status symbol that announces your status as pathetic?”

Big problem #3: The biggest flaw with the blue tick manoeuvre is that it won’t solve Musk's money problem. As The Verge points out, “[E]ven if every one of Twitter’s 400,000 verified accounts signed up for the plan, it would only generate $38 million a year—a fraction of the $1 billion interest payments owed by the company as a result of the new debt.”

Beyond blue ticks: Other money-making ideas being thrown around include allowing premium users to DM celebrities—paying a certain amount per message. Also: adding paywalled videos that can be viewed for a fee. But none of these have been confirmed.

Losing money: Jittery advertisers

Twitter makes 90% of its revenue from advertising. Musk has long argued that this is a problem for anything that styles itself as a “public square”—and many on the left agree. But soon after taking over Twitter, Musk immediately tried to reassure advertisers—promising that he will not allow the platform to turn into “a free-for-all hellscape.” After all, it would be foolish to jeopardise an existing revenue model for any future version Musk has in mind. 

But, but, but: Musk being Musk couldn’t help doing his bit to freak out the very same brands by tweeting a nasty conspiracy theory about the brutal attack on Paul Pelosi—husband of House Speaker Nancy Pelosi. He shared a dubious link that suggested it was an assignation with a gay prostitute gone wrong. Soon after, there were headlines galore about advertisers getting cold feet. 

Hitting the ‘pause’ button: On Friday, General Motors suspended Twitter ads. This was on the heels of IPG—a major global advertising conglomerate—telling its clients to “temporarily pause” ad spends on the platform because it is “concerned about Twitter’s future commitment to trust and safety under Musk’s leadership.” Its clients include a huge roster of blue-chip brands such as Mattel, Coca-Cola, Amex, and Spotify. Also hitting ‘pause’: the Volkswagen Group, Danish brewing company Carlsberg Group, and United Airlines.

Key point to note: For starters, fears of recession have hit advertising revenues for all social media platforms. But in Twitter’s case, the decline may have been at least partly tied to concerns about Musk. The number of advertisers dropped from 3,900 in May—soon after he announced his decision to buy the company—to 2,300 in August. The platform added more than 1,000 new brands each month before July. But once Musk got into an ugly legal battle to back out on the deal that number sank to 200.

Not helping matters: Musk has dealt with the setback by going to his default mode: defiance. First, he tweeted:

“Twitter has had a massive drop in revenue, due to activist groups pressuring advertisers, even though nothing has changed with content moderation and we did everything we could to appease the activists. Extremely messed up! They’re trying to destroy free speech in America.”

Soon after, a coalition called Stop Toxic Twitter—consisting of more than 60 civil rights groups including the Anti-Defamation League and the NAACP—urged a global brand boycott. Musk then tweeted again—promising to “out” companies who were giving into activist pressure: “A thermonuclear name & shame is exactly what will happen if this continues.”

A Tesla concern: Barron’s notes that much of the company’s value is tied to Musk’s personal brand. Damage suffered in the course of these Twitter wars could spread—posing a far greater danger to his most treasured asset:

“Tesla has become the world’s most valuable car company without spending on traditional advertising. That was possible thanks to Musk’s personal brand as someone working to save the environment. Now, Musk’s reputation is at risk as he wades into social-media management—and occasionally tweets conspiracy theories. To counteract that, Tesla may need to start considering how to separate its brand from that of its CEO.”

The main takeaway: Back in April, New York Times warned that Musk’s ideological stance—the very reason he claims to have bought Twitter—is at odds with the deal he inked to buy it:

“The structure of the deal means Mr. Musk’s push for unfettered ‘free speech’ on Twitter could find itself in conflict with the company’s basic need to pay off its new debt. If less restrictive moderation of content on the platform leads to more unfiltered exchanges and misinformation, Twitter’s main source of revenue — advertising — could suffer, since most advertisers are wary of associating their brands with polarising content. And the company doesn’t yet have other meaningful sources of revenue, although it has experimented with subscriptions. If advertising revenue falls, Twitter… could struggle to make interest payments.”

The bottomline: The cash-strapped Twitter may or may not become a “hellscape.” But unless Musk takes a more pragmatic, less trigger-happy attitude, it will most certainly go broke:

“Whether you agree with him or not, Musk has real ideas about how Twitter should be run, and the point of buying the company was to try them out. He’s wildly, obscenely rich, and he just spent tens of billions of dollars insulating Twitter from public markets. But private companies can go bust just as easily as public ones, and even very, very rich people can overextend themselves. If Elon’s first week on the job is any indication, he’s now much more attuned to that possibility than the abstractions of free speech.”

Reading list

• Nilay Patel pens a brilliant piece in The Verge that explains why Musk’s ‘free speech’ stance—love it or not—is simply not good business for a social media platform. 
• Also a must-read—Kate Knibbs in Wired on the big blue tick move.
• We didn’t get into the big layoffs—Musk’s key cost-cutting measure. Gizmodo has more on the AI ethics and human rights teams that were gutted.The Guardian focuses on the cuts in content moderation—while Mint looks at the implications for H1-B workers.
• On Twitter’s finances, we recommend this New York Times piece—and this Verge overview. This older Washington Post op-ed ties the flawed deal to magical thinking in Silicon Valley.
• New York Times also has more on the slew of money-making ideas being considered inside Twitter.