Is it possible for X to face bankruptcy under Elon Musk's leadership?
Elon Musk's harsh criticism towards advertisers who are boycotting X, previously referred to as Twitter, has left specialists puzzled. If the current trend of advertisers departing and not returning continues, will X be able to stay afloat?
In April, I had the first of numerous disorganized discussions with Musk regarding his purchase of X.
He made a comment that, looking back, was quite insightful, but I didn't notice it when he mentioned it.
He mentioned advertising, stating, "If brands like Disney are happy to promote kids' films [on Twitter], and Apple doesn't mind showcasing iPhones, it suggests that Twitter is a suitable platform for advertising."
After seven months, Disney and Apple have ceased their advertisements on X, and Musk is boldly suggesting to these departed firms to "Go [expletive] yourself."
After a US-based group, Media Matters for America, conducted a probe that led to ads being showcased alongside pro-Nazi content, the firms halted their advertisements. X vehemently disputed the findings, expressed doubts about the research techniques used, and filed a legal case against the group.
During a heated discussion on Wednesday, Musk mentioned the term "bankruptcy", indicating the severe impact the advertisement boycott is having on the company's profits.
The concept of bankruptcy might appear unfathomable for a firm he acquired last year for $44bn (£35bn). However, it is a possibility.
To comprehend the reason, it's necessary to examine how dependent X is on income from advertisements – 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 the core aspect of the enterprise.
Musk strongly suggested this on Wednesday.
"He stated that if the company goes under, it would be due to an advertiser boycott leading it to bankruptcy."
Mark Gay, the principal client executive at Ebiquity, a marketing advisory firm that collaborates with numerous businesses, states that there's no indication of anyone coming back.
"He says that the funds have been withdrawn and no one is creating a plan for re-investing in that area."
Walmart, the large-scale retailer, declared on Friday that it has ceased its advertising activities on X.
In Wednesday's interview at the New York Times DealBook Summit, Musk addressed the advertisers who had left X. However, he made a comment that caused even more discomfort among the advertisers.
"Hello Bob," he remarked, alluding to Disney's CEO, Bob Iger.
Lou Paskalis, from AJL Advisory, suggests that CEOs will become increasingly hesitant to engage with X when they are targeted by Musk.
The main analyst at Insider Intelligence, Jasmine Enberg, points out: "You don't have to be a social media guru to realize that publicly criticizing advertisers and companies that financially support X could harm the business."
Is it possible for X to actually become bankrupt?
Without permanent advertisers, what is left for Musk?
During our conversation in April, it was evident that he recognized that X's subscriptions were not going to supplant the revenue generated from advertisements.
"If around a million people are paying roughly $100 per year for a subscription, that sums up to $100 million. However, compared to advertising, this is a relatively minor source of income," he informed me.
Twitter generated approximately $4 billion from advertising in 2022. However, Insider Intelligence predicts a decrease to $1.9 billion in this year's ad revenue.
The business has two significant expenses. The prime one is the cost of its employees. Musk has already drastically reduced X, resulting in thousands of layoffs.
The subsequent obligation involves managing the debts Musk incurred to purchase Twitter, which amount to approximately $13bn. According to Reuters, the company is now required to make annual interest payments of around $1.2bn.
Should the business be unable to cover the interest of its debts or meet payroll expenses, then indeed, X might genuinely face bankruptcy.
However, that would be a severe situation that Musk would definitely try to steer clear of.
He possesses choices. The easiest course of action for Musk would be to invest more of his own wealth, but it seems he is not inclined to do so.
Musk has the option of trying to negotiate with the banks for less burdensome interest payments. For instance, he could request for "payment in kind" interest, which allows for postponement of payments.
If attempts to renegotiate fail and the banks are unable to retrieve their money, bankruptcy might be the only solution left. At this stage, the banks might attempt to advocate for a shift in management.
"Things could get quite chaotic and complicated," comments Jared Ellias, a law professor at Harvard Law School. "Moreover, it would pose a significant challenge. Due to the continual legal depositions and court testimonies, it would undoubtedly generate a lot of media attention."
This could severely damage Musk's professional standing, and it might also influence his ability to secure loans in the future.
In a situation where bankruptcy occurs, would X just cease to function?
Ellias expresses his doubt, stating, "That seems quite unbelievable to me. If such a scenario were to occur, it would be due to Elon's decision to abruptly withdraw support. However, even in such a case, the lenders would still have the opportunity to drive the company towards bankruptcy, secure the appointment of a trustee, and resume operations," he explains.
What's Musk's subsequent move?
The clear answer to all these issues for X is to swiftly identify an alternative source of income. Without a doubt, Musk is making attempts.
He has initiated a fresh audio and video call service. The previous month, he broadcasted himself engaging in video games with the aspiration that X can rival applications such as Twitch.
His aspiration is for X to evolve into an "all-in-one application", encompassing everything from messaging to online transactions.
The New York Times obtained a presentation Musk was showing to potential investors last year. It revealed that X was projected to generate $15 million in 2023 from a payments business, with an expected increase to approximately $1.3 billion by 2028.
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Take a look: A surprise BBC interview with Elon Musk… condensed into 90 seconds (April 2023)
X possesses an enormous wealth of data, and its extensive collection of dialogues can be utilized to educate chatbots. Musk asserts that this data has immense value.
Thus, X does possess potential.
However, for the time being, none of these alternatives can fill the gap left by advertisers.
That's why Musk's vulgar tirade left many perplexed.
"Paskalis admits he doesn't possess any sensible theories. He acknowledges there's a profit-making strategy within his mind that he can't quite grasp."
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