Is it possible for X to go bankrupt under Elon Musk's leadership?
Elon Musk's vulgar tirade against advertisers who are boycotting X, previously Twitter, has left specialists confused. If these advertisers continue to depart and fail to return, does X have a chance of survival?
In April, I had the first of several tumultuous conversations with Musk regarding his purchase of X.
He made a comment that, upon reflection, was quite enlightening, but it went unnoticed by me initially.
He mentioned advertising and said, "When companies like Disney are happy to advertise kids' films and Apple doesn't hesitate to advertise iPhones on Twitter, it signifies that Twitter is an effective platform for advertising."
After a period of seven months, Disney and Apple have ceased advertising on X, and Musk is boldly instructing these departed companies to "Go [expletive] yourself."
After a US firm, Media Matters for America, conducted an investigation, several businesses halted their advertisements since they were being displayed alongside pro-Nazi content. X vehemently disputed the findings of this investigation, scrutinized their research techniques, and initiated legal proceedings against the firm.
During a heated discussion on Wednesday, Musk also mentioned the term "bankruptcy," indicating the significant impact the advertisement boycott is having on the firm's profits.
It may seem implausible for a company that he purchased for $44 billion (£35bn) last year to go bankrupt. However, it's not entirely impossible.
To comprehend the reason, it's crucial to examine X's dependence on advertising earnings – and why advertisers are not returning.
Even though we lack the most recent data, approximately 90% of X's income came from advertising last year. This is fundamentally the core of the business.
Musk strongly suggested this on Wednesday.
"He stated that if the business collapses… it will collapse due to an advertising boycott. And that will be the reason for the company's bankruptcy."
Mark Gay, the primary customer representative at the marketing advisory firm Ebiquity, which collaborates with numerous businesses, indicates that there are no indications of anyone coming back.
"He states that the funds have been withdrawn and no one is devising a plan for reinvestment there."
Walmart, the retail behemoth, declared on Friday that it has ceased advertising on X.
During his conversation at the New York Times DealBook Summit on Wednesday, Musk strongly addressed the advertisers who had left X. He made a comment that caused an even stronger reaction among the advertisers.
"Hello Bob," he uttered, hinting at the CEO of Disney, Bob Iger.
Lou Paskalis, from AJL Advisory, suggests that when Musk targets top executives in this manner, they become even more hesitant to engage with X.
The main analyst at Insider Intelligence, Jasmine Enberg, suggests that you don't need to be a social media specialist to comprehend that publicly criticizing advertisers and businesses that fund X's operations will not bode well for the company.
Is it possible for X to really become insolvent?
Without advertisers permanently, what resources does Musk possess?
During our conversation in April, it was evident that he realized subscriptions on X wouldn't substitute the revenue from advertisements.
Should you have a million subscribers each paying roughly $100 annually, that would amount to $100 million. In comparison to advertising revenue, this is considered a relatively minor source of income," he explained to me.
In 2022, Twitter generated approximately $4 billion from advertising. However, Insider Intelligence predicts that this figure will decrease to $1.9 billion this year.
The business has two significant expenses. The primary one is its payroll. Musk has already drastically reduced X, resulting in the dismissal of thousands.
The subsequent commitment involves managing the debts Musk incurred to acquire Twitter, which is approximately $13bn. According to Reuters, the firm is now obligated to make annual interest payments of roughly $1.2bn.
Should the business be unable to cover its loan interest or meet payroll expenses, indeed, X might genuinely face bankruptcy.
However, that's a drastic situation that Musk would definitely aim to steer clear of.
He has choices. The easiest route for Musk would be investing more of his personal wealth, but it seems he is not keen on this idea.
Musk might consider renegotiating with the banks to lessen the burden of interest payments. For instance, he could request for "payment in kind" interest, which allows for deferred payments.
If attempts at renegotiation fail and the banks are unable to recover their funds, bankruptcy might be the sole alternative. At this stage, the banks might attempt to advocate for a modification in the administration.
"It would be incredibly chaotic and intricate," states Jared Ellias, a legal scholar at Harvard Law School. "Moreover, it would be highly demanding. It would stir a lot of media attention as he would frequently be subpoenaed and required to provide testimony in court."
This could severely damage Musk's professional standing and could also affect his future borrowing capabilities.
In the event of bankruptcy, would X just cease to function?
Ellias expresses his skepticism, stating, "That seems incredibly unlikely to me. If such a situation were to occur, it'd only be due to a drastic move from Elon. Even so, if he chose to take that route, the lenders would still have the power to drive the company towards bankruptcy, have a trustee put in place, and restore operations," he explains.
What's Musk's next move?
The clear answer to all these issues for X is to quickly discover a new source of income. Musk is definitely making an effort.
He has initiated a new service for audio and video calls. Last month, he broadcasted himself playing video games with an aspiration that X can rival applications such as Twitch.
His desire is for X to evolve into an "all-in-one app", encompassing all features from messaging to digital transactions.
The New York Times reported that they obtained the presentation Musk prepared for potential investors last year. According to it, X was projected to generate $15 million in 2023 through a payment business, which was expected to increase to around $1.3 billion by 2028.
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See: A surprising interview with Elon Musk on BBC… condensed into 90 seconds (April 2023)
X possesses a large amount of data, with its extensive repository of discussions that can be employed for chatbot training. Musk is of the opinion that this data holds immense value.
Indeed, X possesses potential.
However, in the immediate term, none of these alternatives fill the gap left by advertisers.
This is why Musk's vulgar tirade left many perplexed.
"Paskalis admits that he doesn't have any plausible explanations. He suggests that there's a financial strategy in his mind that he can't quite grasp."
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